Tyler Cowen's Blog, page 470

List of economists for Romney

You will find it here.

A Simple Strategy for High Returns?

Morgan Housel presents some interesting data at The Motley Fool but draws the wrong conclusion:

…the single best stock to own from the 1950s to the early 2000s had nothing to do with computers, or technology in even the loosest sense. It was Altria (NYSE: MO ) , the maker of Marlboro cigarettes, which returned nearly 20% a year for 50 years. During a period when new industries transformed the lives of nearly everyone in the developed world, the most money was made in a company that stuffed tobacco into paper tubes the way it had for more than a century.

…Microsoft’s profits have grown 16-fold since 1995. Yet once again, the best stock returns may surprise you. With dividends, Microsoft has returned 511% since mid-year 1995. But Clorox (NYSE: CLX ) returned 560% during that time — so bleach actually bested the last leg of the computer revolution. Colgate-Palmolive (NYSE: CL ) returned 651% over the same period, so toothpaste did, too. As did garlic powder: McCormick returned 642%. Ditto for hamburgers, with McDonald’s (NYSE: MCD ) adding a 540% gain. Hormel Foods produced a 544% gain over the same period, so Spam was actually more profitable than computers during the big boom. Our old friend Altria scored a 1,300% gain, nearly trebling Microsoft’s return.

Admittedly, I’ve cherry-picked the dates to make my point. Back up a year or two, and Microsoft wins. But the fact that any period — a 17-year period no less — can be found during which a company with a virtual monopoly on a booming industry underperforms the dullest of products is extraordinary. It also underlines two important investing lessons…

One lesson Housel draws is that “simple products that rarely change often make better investments than those undergoing breakthroughs.” Rubbish. (Did Housel even compare simple products with breakthrough products? No. He just found some winners over a particular time frame.) The real lesson is that expectations, good and bad, are baked into prices so winners and losers are always unexpected. Unless your name is Warren Buffett, you should index.

Hat tip: Newmark’s Door.

The benefits of learning a second language

Bryan has had a few recent posts criticizing the notion of multilingualism for (most) Americans.  As a general advocate of learning foreign languages, I have a few points in response:

1. There is a sizable literature on the cognitive benefits of bilingualism.  I get nervous when I see the topic discussed without reference to the main claimed benefits.

2. I believe that good fluency in a second or third language significantly expands one’s ability to see and understand and also articulate other points of view.  And most of the very great thinkers of the past were fluent or semi-fluent in multiple languages.  By teaching other languages at an early age, we can make our most productive thinkers deeper and more productive.

3. Ideally foreign languages can be taught to individuals when they are young, well before high school, thus very much lowering the opportunity cost of such instruction.  Just toss out some of the other material, making sure to keep mathematics and English literacy.  Most of Western Europe does this quite well, and I hardly think of those children as miserable.  I don’t see why this has to cost anything at all.

4. I am reasonably sympathetic to the “we’re so uncommitted to this notion we’ll never see it through so let’s not bother trying” response to my attitude.  (In particular it is harder for Americans to get within-culture reinforcement for language learning in the way that Europeans so often do, either from American popular culture or from crossing a nearby border.)  Yet that’s a far cry from believing it would actually be a mistake to invest resources in that direction, if indeed we would see it through.

Here is one stimulating discussion of the topic, in English of course.

*Queen of Versailles*

I enjoyed this movie, although I didn’t think it lived up to its most enthusiastic reviews.  It is striking how much economics the film contains.  The implicit macro model of the crash emphasizes the credit channel, rather than the monetary channel.  Repeated cuts to nominal wages fail to work because credit/liquidity is a complementary factor of production.  There is another implicit model of lender asymmetry, namely that your old lenders may try to drive you under, to get the collateral, and competition from new, less informed lenders cannot step in to fill the gap.  The fixed costs of bankruptcy are high.  The male protagonist in the movie is a Caplanian pro-natalist, and a satire of such at the same time.  Habits are formed, and then unformed, and possibly will be formed again.  The wealthy are not so different from the rest of us.  Someone didn’t read Aristotle, or for that matter Markowitz and Tobin.

Facts about Medicare

I’ve got a modest proposal: You’re not allowed to demand a “serious conversation” over Medicare unless you can answer these three questions:

1) Mitt Romney says that “unlike the current president who has cut Medicare funding by $700 billion. We will preserve and protect Medicare.” What happens to those cuts in the Ryan budget?

2) What is the growth rate of Medicare under the Ryan budget?

3) What is the growth rate of Medicare under the Obama budget?

The answers to these questions are, in order, “it keeps them,” “GDP+0.5%,” and “GDP+0.5%.”

Let’s be very clear on what that means: Ryan’s budget — which Romney has endorsed — keeps Obama’s cuts to Medicare, and both Ryan and Obama envision the same long-term spending path for Medicare. The difference between the two campaigns is not in how much they cut Medicare, but in how they cut Medicare.

That is from Ezra Klein, and here is further comment.

Assorted links

1. How are the Chinese solar companies doing?

2. Claims about Neanderthals.

3. Duncan Luce passes away at 87.

4. China’s money outflow continues, or in contrast here is Scott Sumner on China.

5. Udemy class on energy and the environment.

Old Lady Opposition to Driverless Cars

I think driverless cars will change the design of cities, revolutionize retailing, and greatly change our driving culture, soon for example you will need a license to drive…well, you know what I mean. The scale effects on this technology are tremendous, once it works for one car it works for all. The technology won’t be expensive and it will get better every year. The technology will also get better the more driverless cars their are. Once these cars become common, for example, I expect speed limits for driverless vehicles to be substantially increased.

I do worry about lawsuits in the early years. I am not worried, however, about the following attack on driverless cars which appears to be real although it seems like something from the Onion:

One of the reasons I don’t think this will work is that the technology will be offered first as an option, like cruise control, which will appeal most to the safety conscious. The elderly in danger of losing their license, for example, may appreciate a driverless car. Personally, I would like the driverless option for night driving and I would be much happier lending my teenager the car if I could say “but only if you use the Google option!” At first when there is an accident people will ask, “did he have the driverless option on?” But soon they will start to say “if only he had the driverless option on.”

I do think, however, that technologists should change the name to the electronically chauffeured vehicle. Electronically chauffeured vehicles will appeal to the affluent, the influential and the productive.

The ubiquitous Daniel Lippman gets the hat tip.

Will a more expansionary monetary policy give rise to a bubble?

I’ve been seeing a lot of this question in my Twitter feed.  Here are a few points:

1. If a more expansionary monetary policy helps an economy recover, yes it may well raise the risk of a later bubble.  We should then be cautious, but that is no reason to turn down the prospect of a recovery.  Anything leading to recovery could have a similar risk.

2. There are already plenty of reserves in the system and there is plenty of room for credit to expand over its current level.  Maybe we don’t know what triggers bubble-inducing investment behavior, but why should raising ngdp expectations and realities raise the risk of a bubble, if not for the factor cited in #1?

3. Arguably a flat yield curve induces a quest for higher returns elsewhere or in more dubious investment areas.  Yet the flattening yield curve did not follow quickly from the massive injection of reserves.  Rather it evolved slowly as prospects for real recovery deteriorated and the long-run outlook for the advanced economies turned down.  Real factors drove the flattening, and if monetary expansion brought a bit of recovery it likely would unflatten that curve a bit.  That could well lower the risk of a bubble.

4. I may consider Austrian theory, with regard to this question, in a separate post.

Overall I don’t see this as a reason to reject monetary expansion.  #1 is a real risk but again I’ll take the recovery every time and a lot of the other arguments boil down to that trade-off.

Assorted links

1. The culture that is Japan there is no great stagnation.

2. Tyler Cowen’s unusual final exam.

3. Is labor productivity lower than we think?

4. Why has Sweden had a good recovery?

5. Facts and fictions of D.C.’s gentrification.

The wisdom of Miles Kimball

Don’t have a health care entitlement with no defined amount of money attached. Choose a $ figure and see what we can do with it.

As long as we precommit to lower health care spending by the government, it’s great to hope that comes from pushing prices down.

Those are both from Twitter, and here is a concordance of more of the tweets.  I have myself toyed with this idea from Miles:

How about a new model: free clinics for all we can afford. People on their own for the rest. No employer insurance deduction.