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January 16, 2012
Michael Mussa has passed away
I find only this article in Portuguese, in any case very sad. Here is Mussa on Google Scholar. Here is one of his most famous pieces on exchange rates. Here is a short biography. Here is Mussa on monetary policy in the 1980s. I am sorry to have never known him (I met him once), but many admired him.
Addendum: Here is some good English language coverage.
The influence of MIT on macroeconomic policy
From Rich Miller and Jennifer Ryan:
At MIT, King, 63, and then-professor Ben S. Bernanke, 58, had adjoining offices in 1983, spending the early days of their academic careers in an environment where economics was viewed as a tool to set policy. Earlier, Bernanke and European Central Bank President Mario Draghi, 64, earned their doctorates from the university in the late 1970s, Draghi with a thesis entitled "Essays on Economic Theory and Applications."
Fischer, 68, advised Bernanke's thesis on "Long-Term Commitments, Dynamic Optimization and the Business Cycle," and taught Draghi. Greek Prime Minister and former ECB vice president Lucas Papademos and Olivier Blanchard, now chief economist for the International Monetary Fund in Washington, earned their doctorates from MIT at about the same time.
Other monetary policy makers who have passed through MIT's doors include Athanasios Orphanides, head of the Central Bank of Cyprus, Duvvuri Subbarao, governor of the Reserve Bank of India and Charles Bean, King's deputy in the U.K.
Central banking is filled with former attendees of the Cambridge, Massachusetts, university not just because it was and is one of the world's top schools for economics.
Arnold Kling comments.
What is the price of "going short volatility?"
I've wondered about this question for a while. Let's say that bank manager/CEOs can play a profitable moral hazard game by risking that the lower left tail of the returns distribution won't happen. Write some far out-of-the-money naked puts, or more generally synthesize that position. If you are a sports fan, imagine betting against the Washington Wizards to win an NBA title every year. Most years you earn some above-normal profits. Every now and then you go bankrupt. From the manager's point of view there are bonuses in the good years and in the bankruptcy year the worst that can happen is getting fired. You might even be rehired rather quickly, if shareholders like such strategies too, at the expense of bondholders or taxpayers. Think of that as a private arbitrage opportunity, albeit one with negative social value.
The question is, what happens to the price of that strategy? Does it adjust to choke off more "going short volatility" at the margin? I see at least two options:
1. The return from writing a naked put (and related synthetic positions) falls somewhat, as many banks play that strategy or would play that strategy if the prices of the relevant bets did not adjust. What is then the story for the market as a whole? Are some of the "moral hazard gains" shared with those who buy naked puts? Why should the "tax incidence" problem stop there? Where exactly in the system do those gains come to rest? For sure there are gains to the early users of this moral hazard strategy, but once market prices are adjusting where do the gains go? Can excess returns be seen in observed securities prices?
Of course that there are *many* synthetic ways of writing the naked put or shorting volatility. Do the prices of all of them adjust, over time, as the early users of the strategy scurry from one opportunity, see it closed off by price shifts, and then move on to the next?
The cynic will think that hedge funds are doing well on this one.
2. Perhaps some banks play this strategy but their trades, relative to liquid markets, are not big enough to push around the price. Or maybe arbitrage is too strong and it keeps securities prices in line with standard theory.
Imagine that the fundamental value of a security was $40, but a beautiful woman would give a trader a kiss every time he bought the security, bringing his net private return to $41. Due to arbitrage and short sales, the price of the security will remain at $40, although the private gains will persist from the purchases.
In the latter case banks can't raise enough liquidity to budge the market price, relative to the power of the other side of the market. Along related lines, legal and institutional constraints may limit the "short volatility" strategy and also blunt the effect of those strategies on market prices.
Which case is better/worse for the world as a whole? Does it matter for financial regulation which case is true?
I thank an anonymous hedge fund manager for a conversation on this topic, Interfluidity as well.
Do economists understand the concept of opportunity cost?
Remember those old debates on MR as to what opportunity cost is exactly supposed to mean? Joel Potter and Shane Sanders have an interesting follow-up paper:
Abstract: Ferraro and Taylor (2005) asked 199 professional economists a multiple-choice question about opportunity cost. Given that only 21.6 percent answered "correctly," they conclude that professional understanding of the concept is "dismal." We challenge this critique of the profession. Specifically, we allow for alternative opportunity cost accounting methodologies—one of which is derived from the term's definition as found in Ferraro and Taylor— and rely on the conventional relationship between willingness to pay and substitute goods to demonstrate that every answer to the multiple-choice question is defensible. The Ferraro and Taylor survey question suggests difficulties in framing an opportunity cost accounting question, as well as a lack of coordination in opportunity cost accounting methodology. In scope and logic, we conclude that the survey question does not, however, succeed in measuring professional understanding of opportunity cost. A discussion follows as to the concept's appropriate role in the classroom.
January 15, 2012
The median wage figure and the health care costs figure
The U.S. median wage for 2010 was $26,363.
The average health care insurance premium today is over $15,000 and by 2021 it may be headed to $32,000 or so (admittedly that estimate is based on extrapolation).
Therein lies the problem.
To oversimplify a bit, treat the wage as the economic value produced by the median individual. This will be most on target for individuals who do not receive health care benefits through their current jobs.
Again to oversimplify, treat the health care costs as the economic value needed to produce or maintain the modern individual. (Or rather as part of those costs.) Of course not everyone requires health care in a given year, but societal norms for health care treat these expenditures as if they were necessary, if only morally necessary.
Another relevant comparison is "median income for those who do not have employer-supplied coverage" vs. "future insurance costs for those same individuals." I have not seen such numbers, but the median income of this group is lower, though the stipulation probably is selecting for younger individuals with lower potential insurance premia.
In any case, we will have increasing numbers of individuals for whom the economic value needed to maintain them exceeds the economic value they produce. I don't mean elderly people on life support, I mean able-bodied, working-age individuals. This will make it increasingly hard to implement "health care egalitarianism."
Here is how health care premia rose 63% over the last seven years. In the very last year, however, health care as a percentage of gdp did not rise at all, mostly because a weak economy and higher co-pays cut back on utilitzation. That is the most obvious way our health care cost crisis could end up being solved, though of course it is probably not the best way. We cannot expect it to last whenever substantial economic growth picks up again.
Eventually, p = 0 catches up to you
Especially if it is a product consumers wish to bring home:
In Fairfax, officials more than doubled the inventory of e-book copies from 2010 to 2011, to more than 10,000, but demand for the books tripled in that time. Now the average wait time is three weeks. Of course, there can also be lengthy waits for hardcover and paperback books, although those waits are usually for current bestsellers while older titles are generally available.
By contrast, on a typical day, about 80 to 85 percent of the system's e-books are checked out, said Elizabeth Rhodes, the collection services coordinator for the Fairfax library system. But after the holidays, when many people received e-readers, 98 percent of the collection was spoken for.
Here is more.
Assorted Movie Reviews
Warhorse – stilted acting, cliche ridden in word and image and without a single honest emotion. Some people will love it.
Mission Impossible -Ghost Protocol – proves that Tom Cruise can still deliver the goods and director Brad Bird is bankable for live action even if his animated greats (The Incredibles, Ratatouille) had more plot and humanity. Great scenes on the Burj Khalifa (esp. in IMAX). Drags on in a peculiar effort to connect with story elements from the previous MI that no one cares about or remembers. For plot reasons, the final scene should have been in San Francisco not Seattle.
The Girl with the Dragon Tattoo – Overall, Daniel Craig doesn't James Bond it, although at times one wonders whether he is just pretending to be scared. Rooney Mara is good although I prefer Noomi Rapace who was both tougher and more beautiful, as the moment required. Fincher is the better director and the supporting cast is excellent. Lisbeth Salander rings strong in my imagination and I would watch more adaptations.
Tinker Tailor Soldier Spy - excellent performance from Gary Oldman as Smiley. At something like 8 minutes in I realized that the lead character had yet to speak. It was good but I defy anyone to make a great movie from the Le Carre book, too much is interior. How many viewers will know, let alone appreciate, that many people once did prefer communism for aesthetic reasons?
The Descendants – George Clooney has limited emotional range but it suits him in this role where part of the point is that his character is too boring, methodical, and unemotional for his thrill-seeking wife (why did these two ever marry?) and his now needy children. Excellent performances from Robert Forster and supporting cast and a plot that is involved without being contrived. The contrast between external paradise and internal misery was delightfully disconcerting.
Extremely Loud and Incredibly Close – started out strong but by the time it ended I hated it. Every element of the movie is manipulative; 9/11 is used as a prop (like using 9/11 to sell life-insurance), the parents are perfect even when the story demands imperfection and the kid is weirdly unlikable. Finally, the movie has a happy ending, which made me sad.
January 14, 2012
The culture that is Japan markets in everything
Uguisu no Fun's main effect – that being bleaching and exfoliating the skin – is a result of Guanine, a naturally occurring enzyme found in nightingale droppings. Kabuki actors and high-ranking geisha girls have always prized it as the best way to remove their heavy makeup while leaving their high-priced skin smooth and supple.
The link with photos is here and for the pointer I thank Scott Rogers.
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