Tyler Cowen's Blog, page 464

Father of HFT: Slow Down

Thomas Peterffy is one of the pioneers of automated stock trading. From NPR’s Planet Money:

…The company he started, Interactive Brokers, does electronic trades on a mind-boggling scale. Forbes estimates his net worth is now over $5 billion.

Peterffy says automation has done some very good things for the world. It’s made buying and selling stocks much much cheaper for everyone.

But Peterffy thinks the race for speed is doing more harm than good now. “We are competing at milliseconds,” he says. “And whether you can shave three milliseconds of an order, has absolutely no social value.”

Here are previous MR posts on high frequency trading.

Are isolated capital cities worse?

From Filipe R. Campante,� Quoc-Anh Doy, and Bernardo Guimaraes (pdf):

We show empirical evidence that non-democratic countries with [geographically] isolated capital cities display worse quality of governance, as measured across many diff�erent dimensions. We provide a framework of endogenous institutional choice that accounts for this stylized fact, based on the idea that autocratic elites are constrained by the threat of rebellion, and that this threat is rendered less eff�ective by distance from the seat of political power. Broader power sharing (associated with better governance) means that any rents have to be shared more broadly, hence the elite has less of an incentive to protect its position by isolating the capital city. Conversely, a more isolated capital city allows the elite to appropriate a larger share of output, so the costs of better governance for the elite (the rents that would have to be shared) are larger. In equilibrium, a correlation between isolated capitals and misgovernance emerges as a result. The framework yields additional predictions on the size of the income premium enjoyed by capital city inhabitants and on the level of military spending by ruling elites, which are also supported by the evidence.

The title is “Isolated Capital Cities and Misgovernance: Theory and Evidence.”

As I wrote yesterday, Naypyidaw!  And yet there is more.  Across the fifty American states, isolated capital cities are more corrupt:

We show that isolated capital cities are robustly associated with greater levels of corruption across US states. In particular, this is the case when we use the variation induced by the exogenous location of a state’s centroid to instrument for the concentration of population around the capital city. We then show that different mechanisms for holding state politicians accountable are also affected by the spatial distribution of population: newspapers provide greater coverage of state politics when their audiences are more concentrated around the capital, and voter turnout in state elections is greater in places that are closer to the capital. Consistent with lower accountability, there is also evidence that there is more money in state-level political campaigns in those states with isolated capitals. We find that the role of media accountability helps explain the connection between isolated capitals and corruption. In addition, we provide some evidence that this pattern is also associated with lower levels of public good spending and outcomes.

“Trenton Makes the World Takes” — not exactly!

Christopher Balding on the real risk in China

In the past 5-8 years, and especially the past 3, China has built an enormous amount of stuff that nobody wants, needs, or uses.  Fueled by a lending boom that began in late 2008 and tripled total lending in 2009, Chinese government at all levels has been spending money like a drunken sailor on leave.  What should scare people however, is just how poorly this money has been spent.  To give you a few examples:

The Beijing government admits that 50% of apartments sit empty.  A similar number is found in most major cities in China, not to mention the entire cities that sit empty.
After major investment in wind power generation, most wind power capacity was incapable of generating power because…..it was not hooked up to the grid.
Housing price to income ratios that would make a California real estate bubble blush.  The average home price to income ratio peaked around 12 in California.  The China Daily (the Communist party mouth piece) speaks regularly of ratios in excess of 25.  One recent article noted that the average price per square foot in Beijing was nearly $300 while monthly per capita GDP was only $435.  That means using the long term global average for the income to housing price ratio, the average Beijinger should be able to buy a 7.6 square foot apartment.
Industrial capacity utilization that is officially at 60%.  (If you believe the official numbers I have a 7.6 square foot apartment I’d like to sell you)  This is driven by state owned banks and enterprises that over invested in 2009 due to the stimulus fueled lending boom.

His full post is here.

Bill Dickens and Bryan Caplan have an exchange on poverty and welfare

Read the whole thing.

A look at U.S. income growth

From Jordan Weissmann:

Hat tip from @JustinWolfers.

By the way, Robert Gordon has a new paper pessimistic about future economic growth,  using this tagline at the end of the abstract:  “A provocative “exercise in subtraction” suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades.”  Mark P. Mills is more optimistic.

Assorted links

1. Naypyidaw, capital of Myanmar.

2. Is mobile the future of education in Africa?

3. My colleagues Noel Johnson and Mark Koyama have a new paper on the rise of religious toleration.

4. The riddles of Opal Whiteley.

5. Against dismissive reviews.

6. The rise of time banks in Spain.

The culture that is Singapore

A Singapore property developer is targeting the super rich with parking problems by marketing luxury apartments that allow owners to keep their cars next to their living rooms, even if they are on the top floor of the 30-storey block.

The development, near the city-state’s main thoroughfare of Orchard Road, features what are described as “en suite sky garages” that automatically transport cars in a lift up to the desired level at the touch of a biometric pad in the basement entrance.

…Singapore, along with Hong Kong, is home to more Maseratis, Ferraris and Lamborghinis per capita than anywhere else in the world.

From the FT, by Jeremy Grant, here is more.

From the excellent Yichuan (Lulu) Wang

You all should be following him, or so it would seem to me.  Here are excerpts from his post What China Could Be Building:

The real risk is not that the housing won’t be used, but that the crash would have secondary effects. Local governments are dependent upon land sales for revenues, meaning a housing crash could have serious implications for government. In Guangdong province, some local governments are actually tearing down mountains to make new land in the ocean, all to sell the land. This, along with the recent reversal of capital flows and possible insolvency of private wealth management firms, represents a serious liquidity risk that can have disastrous consequences.

…So let’s answer Scott’s [Sumner] fundamental question:

So here’s my question for all of you China skeptics that insist they are building way too much housing, infrastructure, heavy industry, etc.  What precisely do you want them to build more of?  And what are the 100s of millions of Chinese living in tiny ramshackle homes to do?  Sit tight for a few more decades while resources pour into nice urban services for the pampered elite?I want them to start building leaf blowers, so we don’t have so many Chinese people in the low productivity position of sweeping streets. I want them to start building farm equipment, so we don’t have so many Chinese farmers tending the fields. I want them to build more laundry machines, to free the rural Chinese from scrubbing clothes on washboards. I want them to build electric stoves, so my Grandpa can put away the coal fired outside oven. I want them to build computers that can deliver cheaper education to the masses.

Instead of just focusing on “building,” I want them to invest in human capital, so productivity can be at a level that we don’t need “make work” jobs. I want them to build more schools and hire better teachers, so classes aren’t as large and you’re not damned if you can’t make it in a top elementary school. I want productivity to be high enough that high end stores don’t need more clerks than actual customers.

I want these things among many others that will only be more obvious in a freer market.

That Scott can get a haircut for $4 or an ice cream cone for 50 cents shows how low productivity and wages are in China. Yet they will not grow any faster with more housing or more state directed investments. Cheap subway rides are nice, but are they not just another sign that transportation infrastructure has been built too quickly? I’m not saying China is hitting a ceiling for growth, or that vast swaths of China are condemned to poverty. But what I am saying is that we need to worry about the systemic fragility that underpins the Chinese system, and be very, very concerned about the unknown magnitude of the downside risk.

His full blog is here, his short bio is here.

Chris Hayes responds

In this segment Chris Hayes gives a gracious and interesting response to my post Racism by Political Party.

Visit NBCNews.com for breaking news, world news, and news about the economy

The path dependence of astronaut walks

…there was a fierce behind-the-scenes battle between them to be first to set foot on the Moon. Early plans were for Aldrin, as module pilot, to step out first, but one version reported by Smith has it that Armstrong, as mission commander, lobbied more vigorously than Aldrin, and Nasa backed him up because he would be ‘better equipped to handle the clamour when he got back’ and, more mundanely, because his seat in the lunar module was closer to the door. Aldrin paid Armstrong back by taking no photographs of him on the Moon: the only manually taken lunar image of the First Man on the Moon is in one of many pictures Armstrong snapped of Aldrin, showing himself reflected in the visor of Aldrin’s spacesuit.

That is from this excellent Steve Shapin article, hat tip goes to @MauraCunningham.  I liked this part:

…they were on the same basic pay rates as other US military officers: most were captains, making about $17,000 a year. (On their missions to the Moon, they were entitled only to the standard $8 per diem for being away from base, with deductions for ‘accommodation’ provided in the spaceship.)