EconThoughts.com

A short, scary hypothesis about credit availability

noreply@blogger.com (Trevor F) — Tue, 31 Jan 2012 18:21:00 +0000

This is an incomplete thought, but one I wanted to put down.

Regional bank stocks are not very expensive right now. Entire loan books can be taken out for not much money.

Does this mean that a rational bank that has capital should be looking to take out FDIC-mediated undervalued pieces of loan books from failed banks rather than creating new loans – because functionally, new loans cost market value, and the FDIC will give them new loans for less than that?

Does that mean that only banks with the worst credit analysts create loans? Because banks on the brink of failing can try and "grow their loan book" out of the problem, but the FDIC won't work with them, and they're the ones with lousy credit analysis which is why they got into trouble in the first place? And the ones with capital cuz they're good at credit analysis don't initiate loans?

That seems like a dangerous problem. The FDIC lottery/auction system does create some weird incentive effects.

A Critique of Modern Monetary Theory

noreply@blogger.com (Trevor F) — Wed, 11 Jan 2012 03:22:00 +0000

My friend JP and I have been talking about Modern Monetary Theory
(MMT). You can see more about what its proponents believe here:
http://en.wikipedia.org/wiki/Modern_Monetary_Theory

Or just google "winterspeak" or "warren mosler" for some MMT proponents.

In some ways, MMT is the weirdest economic model I've ever seen.
Fundamentally, it holds that the government determines net savings and
interest rates based on whether it runs a deficit or surplus, and thus
government deficits directly regulate inflation, unemployment and all
the other things we usually attribute to monetary policy. An ancillary
result is that banks are not constrained by their reserve levels, but
instead by the demand for credit, because they can always just get
reserves from the Fed.

The theory starts by saying that it's impossible to do net saving
unless the government runs a budget deficit, defining net saving as
savings minus investment. This is functionally a measure of "money
lent to the government"; there's no distinction between money holding
government bonds and reserves because reserves are deposited with the
Fed, and all money that's put into private assets is ultimately
invested. The Fed can then influence the money supply and interest
rates by running surpluses and deficits – when the government runs a
deficit, it injects money into savings and when it runs a surplus, it
pulls money out of savings.

There are a number of separate issues I have with the resultant set of
conclusions.

Firstly, I'm not sure they quite understand the behavior of interest
rates. In MMT, there's no such thing as "crowding out". When the
MMT-world government runs a deficit, they're injecting more money into
the system which chases interest rates down. In more mainstream
theories, when the government runs a deficit, they're "crowding out"
private capital. In other words, they're injecting more money into the
system, and that money chases the less-elastic supply of things to
buy, which causes inflation unless interest rates go up.

In mainstream economics, a negative supply shock increases inflation
and decreases production because you have more money chasing the lower
amount of supply, so you produce less and spend more on it. Similarly,
a negative demand shock decreases inflation and decreases production
because nobody wants to buy. For example, if velocity suddenly drops
because everyone is worried about whose assets are really worthless
(hello, late 2008) and wants to save cash for the upcoming rainy day,
then spending drops, production drops, and by forcing interest rates
down (and, at the zero bound, inflation expectations up), the
government gets money moving again and restores the economy. This is
Milton Friedman-style monetarism (and, more recently, Scott
Sumner-style market monetarism).

In MMT, however, there is an important assumption. More government
spending injects more cash into the economy, and for that cash to
drive interest rates down instead of up, that cash, on net, needs to
directly chase savings. If the injected cash is instead chasing
private economy goods, some portion of the injected cash will convert
to inflation (exactly how much would be determined by the short-run
aggregate supply curve). This creates a bizarre interest rate
condition – market floating interest rates must go down as inflation
expectations go up, holding Fed action constant.*

This doesn't line up with how investors behave – market floating
interest rates go up as inflation expectations go up (which makes
quite a bit of sense – if your cash is depreciating in real spending
value, you're going to demand a better return on your cash). The only
other possibility is that all the money injected by government
spending goes directly to savings because the private sector doesn't
seek to do anything else with it. That's an unintuitive knife-edge
equilibrium.

The fundamental issue here is that MMT looks so closely at the
mechanics of "how banks deal with excess reserves" (selling them, thus
driving down interest rates) that they ignore the much more important
supply and demand sides (eg, prices are going up and there's more
demand for things, so I'll produce more and we won't need more
savings).

Secondly, and relatedly, I have issues with how they approach real
resource constraints and spending efficiency.

According to MMT, if there's a demand shock that decreases employment,
the government can just run a large budget deficit to drive down
interest rates.

This, unfortunately, ignores a lot of the effects of government
spending on the real economy.** MMT's prescriptions for dealing with
unemployment (run a large budget deficit) and inflation (run a large
budget surplus) completely disregard the efficiency of said spending
or taxation. MMT harps on this idea that "government deficits don't
matter because all you're going to end up doing is paying them off
with money that you either print or take out of the system." They
ignore the fact that the manner in which the money enters the money
supply affects the amount of real-resource damage you do when you pull
it back out again.

If the government pays people to dig ditches and fill them in again,
in MMT world, you're just injecting cash into the economy and forcing
interest rates down (which should stimulate credit creation). Even if
MMT were right about interest rates, the issues are at least twofold:

1) You're increasing the cost of labor for more productive purposes.
This is less important in recession scenarios but it doesn't just
disappear. This creates a negative supply shock.

2) You've incurred a debt that needs to be reversed with either
inflation or taxation down the road, and inflation and taxation
actually have real economic effects.

If you're going to inflate, interest rates no longer go down. Again,
inflation causes market rates to increase because in order to find a
buyer for your debt, you need to pay them for the inflation they
expect. Even if you grant the MMTers their claim that the short rates
will decrease, you'll increase long rates, which actually makes credit
more expensive. Long rates going up are a good thing when they're the
result of long-term optimism about the rate of economic activity.
They're a bad thing when they're the result of pessimism about the
likelihood of inflation during monetization of debt, because that has
little associated positive economic activity associated with it
outside of what you spent the initial money on.

If you're taxing, you're creating a cocktail of bad effects, also –
you're replacing future productive activity with unproductive
activity today, exacerbating your long-term productivity issues.
You're creating crappy incentives in the future with high tax rates,
hurting labor supply. There are potentially other effects.***

Thus, the quality of government spending needs to be taken into
consideration. If the government is excellent at making sure its
spending yields a market rate of return (accounting for future
taxation/inflation, crowding out, velocity of money, etc), then these
issues aren't such a big deal – you're taxing a private economy that
can do X with its money in the future (or doing the same damage via
inflation) and doing X or better today, and you're not increasing the
cost of labor for more productive purposes because there aren't that
many more productive purposes. Fine. But if your government looks
anything like the US government, where there is a LOT of pork
spending, economically-inefficient/growth-retarding welfare spending
(sometimes justified on other moral grounds, and sometimes not, but
certainly not justified on an economic return basis), and incremental
spending tends to be much worse than average spending… these are
serious issues which can't be waved away in the mechanics of everyday
bond transactions. Believe me, the people buying bonds aren't.

Relatedly, MMTers end up hyperfocusing on flows and ignore stocks (of
debt, of capital, of anything). There are plenty of situations where
the stock of something affects the price and speed at which it can
flow. Venezuelan debt comes to mind - everyone's so concerned they're
going to default or inflate that increased government spending would
just make the problem worse – they wouldn't be able to sell their
bonds, they'd need to print money and inflation would increase their
interest rates. There's a confidence effect in a government's
willingness and ability to repay that gets ignored in the intense
focus on lending mechanics.

Thirdly, I'm not sure that they even make sense talking about the
mechanics of interest rates, holding the entire real economy constant.
MMTers argue that if the government has a net positive outflow in one
day (deficit), the short rate must be equal to the central bank's
reserve rate because banks have too much reserves and thus deposit it
with the Fed. However, the fact that the Fed can set the discount rate
implicitly gives the Fed power to tweak short rates and get the money
supply and credit creation they want based on market conditions.
Increased government spending doesn't matter in that calculus – the
Fed can just set the discount rate they want.**** No more deficit
control of interest rates.

Fourthly, their loan creation dynamics only make sense in a very, very
technical reading. Banks need to be able to physically give money to
someone for a loan, and for them to do that, they need to get the
money – which means they're pulling it out of their excess reserves or
off the interbank market, and when the Fed is willing to supply
unlimited capital, they can borrow whatever they want to create loans.

But one major role of Fed discount rates and other monetary
intervention is to set the opportunity cost of lending for banks at an
appropriate level. The Fed can tweak short rates or to get the money
supply and credit creation the Fed wants based on market conditions.
Loan creation isn't a function of some abstract version of credit
demand and the desire of banks to underwrite loans, it's a function of
the credit demand and the desire of banks to underwrite loans at the
interest rate that is the opportunity cost of a bank's funds plus a
spread for risk (and profit).

Finally, as Scott Sumner points out here -
http://www.themoneyillusion.com/?p=10178 – and here -
http://www.themoneyillusion.com/?p=10238 -the MMT theory of credit
creation, in which money supply is endogenous, would make the price
level indeterminate. In the extremely short run, credit creation may
make money supply endogenous, but ultimately, rates will be moved by
the Fed to change the money supply and thus credit creation and the
price level. If money supply is endogenous to credit creation, then
why do countries with more credit per capita not have higher prices
per capita? I understand how the price level works when money supply
is exogenous, but when it's endogenous, it's a much more nebulous
concept. To quote the second article above, "MMTers forgot that the
nominal interest rate is the price of credit, not money. The Fed can't
determine that rate, it reflects the forces of saving supply and
investment demand." (note that this aligns with my first footnote
below).

There are a number of other issues that I either feel unqualified to
talk about*^* or are merely "very common" pieces of MMT rather than
fundamental to the ideology.*^*^* In general, I've tried to wrap my
head around MMT and am having issues. Am I missing something? If I am,
please let me know.

*Note that market floating interest rates are different from the rates
the Fed can use in a response – in both cases, you'd expect the Fed to
respond to high inflation expectations by raising the interest rates
it controls to pull money out of the economy. In MMT-world, that could
mean higher inflation expectations have indeterminate effects on
interest rates, whereas in mainstream-world, higher inflation
expectations lead to higher interest rates.

** Note that MMTers are not alone in making this mistake; many of the
Keynesians do, too. I wrote a post on this here:
http://tfideas.blogspot.com/2012/01/frustrating-responses-by-famous.html

***Again, I spend a lot of time on related topics here:
http://tfideas.blogspot.com/2012/01/frustrating-responses-by-famous.html

****Even ignoring that – it's possible I'm misunderstanding the
argument because I can't imagine MMTers would miss something that
simple – I'll refer back to the crowding out problem. They implicitly
(and in some cases, explicitly) deny the existence of crowding out,
where the government has a net positive change in outflow because the
private sector buys their bonds and removes its money from the money
supply. If I save more and the government spends more, the effect on
interest rates will depend on a lot of things - the short-run
aggregate supply curve and resulting elasticity in how much the
private sector spends, the velocity of money and the relative economic
efficiency and velocity of private vs. public spending. It also
depends on how the private sector is allowed to lend against the bonds
they hold, but that's outside my area of expertise.

*^* You may need to integrate "bank expectations of the future path of
interest rates" into their treatment of bank behavior at the zero
interest rate bound, for example, because if I read MMTers correctly,
banks should lend to every positive NPV project that comes along at
the zero bound, but I'll posit that consumers aren't seeing interest
rates quite THAT low, even adjusting for risk. All of that assessment
should be left to someone more qualified to talk about it.

*^*^* One I find particularly obtuse is the "Job Guarantee", which
comes up a lot as an MMT solution to many things (in the program, the
Federal Government would guarantee a job at a fixed wage to the
unemployed). This site here:
http://bilbo.economicoutlook.net/blog/?p=10554 seems to indicate that
a job guarantee would anchor demand-side inflation because people who
had those jobs would have a fixed wage. I find this confusing; we had
demand-side inflation when they had no wages to spend. Why would
giving them wages to spend – fixed or flexible - mitigate demand-side
inflation?

Frustrating Responses by the Famous Keynesians

noreply@blogger.com (Trevor F) — Thu, 05 Jan 2012 19:17:00 +0000

Brad DeLong responds to John Cochrane, and Krugman approves of
DeLong's argument and comments Krugmanly on those who disagree with
them.

Cochrane:
http://faculty.chicagobooth.edu/john.cochrane/research/papers/fiscal2.htm

DeLong:
http://delong.typepad.com/sdj/2012/01/understanding-the-chicago-anti-stimulus-arguments-a-response-to-kantoos.html

Krugman:
http://krugman.blogs.nytimes.com/2012/01/04/the-nonsense-problem/

I think I understand the model they're thinking about this with, but
it seems to me to be obsessively short-term focused. They take
Cochrane to task on some technical things, but a "best argument
possible" read of Cochrane's fiscal argument, tweaking some of the
stuff he gets wrong, is something they do not think about (and,
reading them regularly, don't ever respond to, which aligns with Alex
Tabarrok's issue with Krugman's argument style at Marginal
Revolution).

This isn't to say that I agree with all of Cochrane's statements. I
think Cochrane misses that some substitution occurs intertemporally in
a world that's not perfectly rational expectations – but Krugman and
DeLong seem to indicate no substitution at all when they take him to
task for this.

Cochrane's argument is best summarized with these two paragraphs:

"[L]et's think of a "fiscal stimulus" in which the government borrows
money and spends it, but with the clear plan that the debt will
eventually be repaid with future taxes, not just by printing money.
Can this kind of stimulus work, and if so how?… First, if money is not
going to be printed, it has to come from somewhere. If the government
borrows a dollar from you, that is a dollar that you do not spend, or
that you do not lend to a company to spend on new investment. Every
dollar of increased government spending must correspond to one less
dollar of private spending. Jobs created by stimulus spending are
offset by jobs lost from the decline in private spending. We can build
roads instead of factories, but fiscal stimulus can't help us to build
more of both. This form of "crowding out" is just accounting, and
doesn't rest on any perceptions or behavioral assumptions.*… Third,
people must ignore the fact that the government will raise future
taxes to pay back the debt. If you know your taxes will go up in the
future, the right thing to do with a stimulus check is to buy
government bonds so you can pay those higher taxes. Now the net effect
of fiscal stimulus is exactly zero except to raise future tax
distortions. The classic arguments for fiscal stimulus presume that
the government can systematically fool people [This is the Ricardian
Equivalence argument].

The government should borrow to finance worthy projects, whose rate of
return is greater than projects the private sector would undertake
with the same money, spreading the taxes that pay for them over many
years, after making sure its existing spending meets the same
cost-benefit tradeoff. Just don't call it "stimulus," don't claim it
will solve our current credit problems, "create jobs" on net, or do
anything to help the economy in the short run, and don't insist that
we have to pass this monstrous bill in a day without thinking about
it."

The pieces of DeLong's response most relevant to these paragraphs can
be summarized:

1) "[C]rowding out only happens "if we are in a cash-in-advance
economy with a technologically-fixed velocity of money. But we
aren't."

2) "The government purchases $100 billion of goods, issues $100
billion of bonds, and raises taxes by $3 billion a year in order to
amortize the bonds. Government purchases go up by $100 billion this
year. Private consumption goes down by $3 billion this year. Net
fiscal impetus is not $0 but rather $97 billion. Cochrane doesn't
understand the Ricardian Equivalence argument he is trying to make."

My responses to these:

1) I fall into the Scott Sumner camp - fiscal spending is endogenous
to the Fed's reaction function, which means that a perfect Fed is
going to result in a fiscal multiplier of zero outside of supply-side
effects. Or, in lay terms, you can't stimulate the economy with
government spending very well, because the Fed's going to offset any
demand-side stimulus or slowdown and it's hard to find any government
spending on top of what we already do that helps the supply side. Tax
cuts hold slightly more promise, but still, the effects would be small
in the short-term (though potentially bigger in the long-term).

This is less true if you believe in liquidity traps (which mean the
Fed can't stimulate well). Market reaction to unconventional Fed
action makes me skeptical that we're in a liquidity trap, but I know
that Krugman and DeLong believe we are, so for the purposes of this
debate, let's assume they're right, and we are in a liquidity trap.

2) Let's grant, for a moment, DeLong's point that crowding out of
private savings and investment don't matter here. I have trouble
intuiting how relevant the "cash-in-advance economy" part is because
generally speaking, you do pay cash pretty quickly – within a couple
months – but the velocity point is important, and what DeLong doesn't
say is that for the purposes of this crisis, credit intermediation is
clearly having problems, hence lots of (seemingly) excess reserves.
There's also the possibility that you're selling part of that 97
billion in bonds to foreigners who would otherwise sit on the cash
rather than spend it immediately (hello, political ramifications of
seizing foreign currency held at the central bank in China / other
Asian growth model countries). So we'll give DeLong the crowding out
argument, for purposes here.

3) For Cochrane's Ricardian equivalence argument to happen, you need a
world that is very, very rational expectations – and while I have no
papers off the top of my head to confirm this, the empirics probably
don't back up the fact that if the government threatens to tax you 100
billion in the future in the private sector, you pull back 100 billion
of spending into savings right now. DeLong ignores this rational
expectations argument entirely in his response about Ricardian
Equivalence, and I think the right answer is probably somewhere in the
middle.** This, itself, is also not damning of DeLong's response; it
weakens the argument but doesn't ruin it.

Which finally brings me to my big issue with how Krugman and DeLong
are approaching Cochrane's arguments.

To an extent, the multiplier of spending is going to be based on the
productivity of whatever you're spending on. This is pretty simple.
Your unproductive spending is not going to multiply as much because it
won't have a positive impact on the economy outside of the first order
employment boost and associated consumption spending. Building a
subway from New York to New Jersey allows trade and labor mobility
that stimulates further economic growth; digging a ditch doesn't do
anything.

If you impose large future taxes to pay for unproductive investments
today, you certainly do create some fiscal impetus today (ignoring Fed
endogeneity from point 1 and assuming a liquidity trap). But you're
doing this by reducing economic productivity tomorrow with tax
increases. This is what Cochrane is alluding to when he talks about
governments funding projects with a rate of return above the market's
- you're going to harm the economy if you transfer projects from
market-rate productivity projects to below-market-rate productivity
projects. Instead of pandemic protection or useful highways, you're
building a bridge to nowhere, or a high speed rail in areas that won't
use it, or solar panel factories that aren't efficient enough to
compete.

So if the items you're buying today are unproductive (say, ditch
digging, or at least a portion of the fiscal stimulus passed), and the
activity you're taxing is productive (like the US private economy),
then you're creating a cocktail of bad long term outcomes:

1) You've replaced future productive activity with unproductive activity today.

2) You've created crappy incentives in the future with high tax
rates, hurting the supply side.***

3) There's also a temptation to reallocate funds to the places that
"need it most", which may be the areas that overbuilt and misbehaved
the most (in this recession, housing-related areas). This is very
Austrian, but on the supply side, the Austrians could have a point
(even if I disagree with them on the demand side). Look at GSE
funding, for example. This creates not only long-run moral hazard but
also inefficiently continues the misallocation (credit for housing
remained cheap throughout the downturn. Even if you believe, as I do,
that household formation is the big housing issue now and excess
housing supply is no longer the problem, it certainly was the problem
for a long time). I don't know how applicable this Austrian argument
is by magnitude but it's at least plausibly a measurable factor.

4) You reduce skill-damaging long-term unemployment today, but unless
you believe the economy will get a LOT more dynamic, it's going to be
hard not to increase long-term unemployment by even more tomorrow as
overall cyclically-adjusted (ie, structural) unemployment goes up
during deleveraging but unproductive investments haven't paid for
themselves.

Basically, you're trading more than 1 job in the future for 1 job
today. Maybe the economy is in such rough shape right now that it has
no choice but to be way more dynamic tomorrow, but you still think
long-term unemployment is going to be super damaging for each
individual****, so you're willing to trade 2 jobs tomorrow for 1 job
today because you think long-term unemployment (and misallocation)
will disappear in the more dynamic economy. But you need a really,
really large effect of long-run unemployment to make that happen, and
you need to be a major optimist about the effects of technology and
policy on the supply side. Because otherwise, fiscal stimulus may be
stimulating in the short-term, but the intertemporal substitution
means you're damaging the economy in the medium or long term. In my
opinion, that's the "best possible interpretation" of Cochrane's
argument, and in my opinion, it's a persistent weakness in Krugman's
and DeLong's arguments for fiscal stimulus. I wish they'd address it
instead of consistently brushing it aside like it doesn't matter.

As an aside:

Just so I'm not criticized for ignoring the rest of DeLong's
arguments, DeLong also notes: "There is nothing in "traditional
Keynesian" thinking to say that you ought to boost consumption rather
than, say, infrastructure investment. Nothing at all." I suspect,
though of course cannot confirm, that Cochrane and DeLong are talking
past each other a bit on investment/consumption. In the private
sector, if financial intermediation isn't working, then government
policy stimulating private consumption pumps more into the economy
than government policy stimulating private investment, because money
gets saved and not lent out. I'm pretty sure that's the (in my opinion
incorrect) Econ 101 argument for government spending rather than tax
cuts as fiscal stimulus. The government doesn't need to worry about
this, so for direct government spending, investment and consumption
should be equivalent.

DeLong also criticizes Cochrane's interpretation of monetary policy.
Largely, I agree with DeLong's criticisms in this arena and will thus
let them go, although I think it's ludicrous to use that as evidence
against his fiscal arguments just via "he doesn't get how the world
works". Argumentation doesn't work like that.

*I've redacted this: "Second, investment is "spending" every bit as
much as is consumption. Keynesian fiscal stimulus advocates want money
spent on consumption, not saved….". It distracts from the main point
but I address it in an aside at the end.

** DeLong assumes that there's no rational expectations in effect at
all – if 100 billion is spent and 3 is paid for, that doesn't mean
you'll get 97 in stimulus right now, if there's some additional
savings. Plenty of people worry about what their future tax rates are
going to be when making savings decisions. I save more knowing that
I'll probably be taxed more on my income in the future than today's
rates. Maybe I'm the only one, but even if I am the only one… you're
no longer at a perfect 97 billion. Less on topic, there's a pretty big
debate going on in the financial planning community about whether to
use Roth IRAs or normal IRAs for young people – if you trusted the
government not to need to raise tax revenue, the long-horizon tax-free
nature of a Roth is wonderful, but for that you have to trust the
government not to remove their tax advantage, which not everyone does.
Rationally, we should be splitting between Roth and Traditional for
planning purposes. Megan McArdle wrote about this recently, as well.
But fine, let's say people don't fully consider future tax rates in
current savings decisions and allow only partially rational
expectations to say there's some fiscal impetus today. I'd agree with
that, even if it's not 97 billion worth in that example.

I'll note that I think the $100 billion argument (DeLong point two)
was directed at the Ricardian Equivalence argument but I think it's
actually an (incorrect) response to crowding out (incorrect because
you're also putting $97 billion into bonds). But again, I grant him
crowding out on velocity and credit intermediation grounds.

***and, following up on the second footnote, possibly mitigated some
of your own current fiscal stimulus' effectiveness through rational
expectations channels – which should be exacerbated by unproductive
investments because people know that what you're spending on will not
grow the economy in the long run much to offset the spending.

Also worth pointing out (or not) for students reading this that you
could create toy economies with tax systems where increased tax
revenues don't impact labor supply decisions, but that economy is not,
should not be and will never be America.

**** also worth noting that there's an argument to be made that
long-term unemployment is less damaging to an individual's prospects
to get back into the labor force when there are lots of people in the
same boat, because a) in a better economy, employers will need to hire
someone, and if long-term unemployed are their only choice, that's who
gets hired, and b) there should be more training programs available
with a critical mass of people who need them.

This isn't to say that long-term unemployment isn't catastrophic to
the economy in a way short-term unemployment isn't – but on a
skill-erosion level, it's probably the same to have 10 additional
units of long run employment today as to have 5 today and 5 tomorrow,
and on a job prospects/retraining level, I'd much rather not be the
only one screwed, which kind of happens if you redistribute long-term
unemployment between today and tomorrow from just today. Thus, it's
slightly better from a labor supply perspective to have more long-term
unemployment in one period than to have the same human-years of
unemployment stretched over two periods, as long as you see an overall
economic recovery. I hope this is clear… if it's not, I'm happy to
follow up.

CETUSA, Hershey and J-1 Visas

noreply@blogger.com (Trevor F) — Fri, 21 Oct 2011 17:51:00 +0000

A friend sent this to me:

Subject: Hershey's exploiting poor foreign student labour.

Mr. Torres echoed many students when he said his lowest moment came with his first paycheck. After deductions by Cetusa for rent, utilities, bus fare and other items, he took home $85 for 35 hours of work. "You wanted a cultural exchange," Mr. Torres was told by the group representative, he said. "This is America and this is the way we do things here."

New York Times article here (also linked above); c/o Tiger Beatdown

My response was totally different to the subject line. It's funny, you see what you look for, I guess. Hershey exploiting foreign workers was not what I got out of this - what I got out of this was that Cetusa, the ostensible non-profit who brought them over, misled them and stole from them. I have a hard time reading this as "corporation exploits people" as much as it is "Holy lord, we have terrible oversight of our nonprofits and government programs" (mixed with "thank you Mom for giving me an education so I don't need to do that type of work"). If they'd received their entire salary and knew what they were getting into, I'm not sure this would have been quite the scandal it is (they would have made about 700 dollars instead of 35). Confirmation bias at work, for both of us, probably.

And by the way, Hershey didn't even run the plant, and while I'm sympathetic to the idea that multinationals should care what happens at their subcontractors, it's not a given that they knew about it - subcontractors usually hide as much as they can from their multinational counterparts because they don't want to give the multinational negotiating leverage about their cost structure (or, for that matter, reason to investigate about labor or FDA compliance). So there's a principal-agent problem there, as well, if you wanna pin this on Hershey instead of its subcontractor. When you're Apple negotiating with Foxconn, that's one thing (huge subcontractor for a principal plant), but this is one small piece of a very, very large network of Hershey suppliers.

Websense

noreply@blogger.com (Trevor F) — Fri, 07 Oct 2011 18:59:00 +0000

I wish I could get fired up about anything as much as most high schoolers get fired up about everything, especially websense, an internet monitoring tool used by companies:

"There is nothing worse than Websense. NOTHING! I don't care if it's f***ing your mom, f***ing a cockroach, or eating the s*** of the monkey you just f***ed! NOTHING!".

Source: Urban Dictionary. That's one way to put it...

And this was an email sent at work:

Do you guys realize we have “quota time” to watch viral videos, via websense? As in, for some reason a youtube video on my music playlist got categorized as “viral video”, and I have 60 minutes of viral video quota time (I don’t know how often it replenishes), that can be used in 10 minute increments.

a) What viral videos last 10 minutes?

b) Why the hell are they quota-ing viral videos?

c) Why is my random demi lovato song considered a viral video?

Seriously somebody at websense should be fired.

In all fairness, Websense does suck. Websense has been used by tyrannical governments to suppress internet access by its citizens. http://en.wikipedia.org/wiki/Websense#Usage_by_governments

Which leads me to one very logical conclusion:

OCCUPY WEBSENSE!

Recovery Planning: The Limitations of Academic Economists

noreply@blogger.com (Trevor F) — Mon, 19 Sep 2011 23:06:00 +0000

One of the things I find somewhat frustrating in academic economic debate about the recession and lack of recovery is the hyperspecialization of most of the people making points. In a system as complex as the US economy, a narrow focus on pieces of the system without understanding second order effects means you're likely to make mistakes.

I'd like to posit a few things:

1) It's impossible to understand fiscal policy without understanding finance - not banking finance, but capital markets finance.
2) It's very difficult to understand fiscal policy without understanding industrial organization
3) It's impossible to understand fiscal policy without understanding monetary policy
4) It's impossible to understand monetary policy without understanding trade
5) It's impossible to understand trade without understanding industrial organization and finance

Walking through each of these will hopefully be revealing.

1) The link between fiscal policy and finance:
I've written pieces here: http://tfideas.blogspot.com/2010/07/hypersimplistic-way-of-thinking-about.html

Summarized and generalized: A government should spend on something or regulate something if the economic impact (call them the economic returns) of that spending or regulation will eventually exceed the cost borne by the society. This cost is a blend of interest rates (government rates in the case of spending, private rates in the case of regulation) at infinite term, economic activity displaced by spending (crowding out), economic activity displaced by current and future taxation and regulation to pay off cost of the initial government spending and regulation.

To think about sensible stimulus, then, you need to think about what the stimulus means.

Interest rates on the short and intermediate end are low, but these rates are short-term rates. They'll need to be rolled over, and given how "sticky" tax rates are, you need to consider short rates in the distant future. Thus, while low interest rates mean the rate of spending can go up, it shouldn't be by very much. Having an understanding of applied finance and having spent time with discount rates on different securities is really important - it's easy for an academic economist to select an interest rate empirically, but until you've worked with discount rates and understand them intuitively as well as academically, you're not going to make a good choice.

I use a projected interest rate of about 7% - 8% moving forward. This was 10% when rates were higher. I do work in finance, but I'm young. I don't claim to know the answer - just that a 4% discount rate (as I see often) is ludicrously low, given that stimulus projects are higher risk projects to not "pay off" than most corporate bonds, given poor quality of project assessment in government.

This means that EVEN IN RECESSION, ignoring crowding out, your spending needs to "return" 7% - 8% to GDP without even looking at crowding out and tax impacts, just based on interest rates.

As a risk control metric, you also need to understand what happens when people lose faith in your ability to repay. As investors in sovereign debt in the PIIGS are finding out, this can make interest rates go up very, very rapidly, and very uncontrollably. So from a risk control perspective, you probably should incorporate that into your assessment, as well.

Of course, at some point, you can ignore interest rates... but that's cuz you've paid off the debt, and you've done that with taxes. So if you ever have any intention of paying down your debt, you need to look at deadweight loss of taxes, as well.

2) Note that I've ignored crowding out - this is because it falls into the "fiscal policy - industrial organization" category.

Many people argue that crowding out isn't of consequence in recessions, because there's so much extra capacity.

The issue with this blanket statement is that there are plenty of frictions based on training. This is widely recognized when talking about unemployment (from people in favor of job retraining programs, etc) but a lot of people seem to forget it when it comes time to talk stimulus. This is a danger of fiscal policy - Spending lots of money on electronic health records can cause a great deal of crowding out, because one job where we really are very capacity-constrained is computer programmers. I've heard a number of issues with a lot of the ARRA infrastructure projects, because laid-off residential construction workers can't do a lot of the jobs required by infrastructure building, so the generally low-quality ARRA projects ("shovel ready" tends to mean "considered and previously rejected as not being worth it") end up taking qualified people off of better projects. Crowding out still happens, so when you're designing fiscal policy, you need to look at the very specific places you have excess labor supply, which requires understanding competitive substitutability, market power, and a number of other factors.

3) As Scott Sumner likes to point out, if a central bank has an inflation target (or, as he'd point out, even better an NGDP target), then fiscal policy is endogenous anyway - as you do more fiscal policy, you do less monetary policy, so all fiscal policy ends up doing is redistributing from the most efficient potential projects on the margin (who benefit most from a small drop in interest rates and increase in inflation expectations, because they can get started) towards projects linked to congressional campaign donors. Even if a central bank isn't perfect at targeting, they're still moving directionally - hence, as Sumner has pointed out, the fiscal multiplier has been like 0.3 or 0.4 since the late 70s, when the central bank started targeting. Even at zero interest rates, there are plenty of monetary options remaining - QE, IOR reductions, NGDP commitments, level targeting - there are plenty of options, and while some of them would need to get through Congress, none of them would be hugely controversial as long as the dual mandate stays in place. Understanding the mechanics and empirics of liquidity traps is also essential to understanding the limits of monetary stimulus and when fiscal becomes more important (and no, I don't believe we're at that point, or have been yet during this crisis). Without understanding how monetary policy works, you'll have a significantly inflated view of the power of fiscal stimulus.

4) Of course, if you don't understand currency and international interest rates, you'll have an inflated view of monetary stimulus. Many of our trading partners - China, Japan, even Switzerland now - peg their exchange rates, which means that monetary policy gets partially sterilized. The US imported about 10 trillion dollars in goods and services in 2008, and we're close to that as an annual run-rate now. Exports run about 8 trillion dollars, off the top of my head, I believe. Monetary policy gets sterilized proportional to some combination of the trade deficit and the overall import number (for a fixed trade deficit it would always be proportional to the trade deficit, but price sensitivity and price stickiness should mean that it's fuzzier than that). That means that you're taking at least a 15-20% haircut on the effectiveness of monetary stimulus, bringing down THAT multiplier.

5) Of course, you could fix the monetary policy sterilization issue of number 4 with tariffs, but those create huge deadweight losses. An import certificates strategy would create smaller deadweight losses (you'd only get the deadweight losses on the products on which we were creating the least producer surplus to begin with, so it'd be way smaller for an equivalent currency move)... but you'd also throw China into a colossal recession because their investment-intensive model, driven by exceptionally cheap capital (driven down by government mandate) would explode (in this opinion, it's going to explode anyway, it's just a matter of when and how badly - how badly being a product of how long they wait before readjusting and how decisively they can move to improve consumption... but anyway), and that would cause problems here in the short run, as well. So moving slowly on trade has benefits, which means you need to size and time your monetary policy accordingly. Additionally, while a readjustment would slow down the rate of job transfer from the US to China, China has a number of structural advantages - their uneducated labor is much lower cost, their land is largely cheaper and their regulatory structure, while still vast, is smaller and less restrictive than the US, which means that to really normalize trade, you have to fix a number of regulatory issues in the US and watch the Chinese banking system to avoid the overly rapid collapse of their investment/property bubble (yes, it's a bubble). You also need to look at all of China's trading partners, many of whom rely on natural resources and will be thrown into major recessions when China pops, because that would offset a lot of the US currency benefits you'd get from a Yuan revaluation.

Thus, it's important to understand input costs, bank lending dynamics, natural and regulatory competitive advantages, resource dependence and behavioral, public choice and financial effects of price swings, etc, when looking at trade.

Note how complicated and convoluted this post has been. It's supposed to be that way. This stuff is not simple, and the argument shouldn't be simple. There are a lot of pieces to understanding economic policy, and when people address these in part without a full acknowledgment, they're doing a disservice.

I hope this somewhat explains my positions on issues as a marginal libertarian - simpler regulation (not even necessarily less regulation, just faster, clearer, shorter, more understandable regulation that's more flexible in the face of innovation and a changing world), lower taxes, much lower government spending and bureaucracy, more aggressive monetary policy (but transparent and indexed to either price level of NGDP level), free trade but with a semi-managed currency to offset foreign currency management, and significant and stable international capital investment by the US to diversify economies. I'm all for job retraining and short term bridge unemployment benefits, but against anything that saps those incentives (like 99 week UI). I'm pro- universal healthcare, but think the route to that is significant deregulation of health insurance coupled with a fixed voucher, not single payer. Etc.

Incentives matter, but it's important to work through the logic. Very few economists I read anywhere actually think about all these areas when putting forward opinions.

One of these is a politician...

noreply@blogger.com (Trevor F) — Thu, 18 Aug 2011 14:37:00 +0000

Two amazing clips from CNN this morning:

Anne Hathaway is my new favorite actress: http://www.cnn.com/video/#/video/showbiz/2011/08/18/ac.anne.hathaway.raps.cnn?hpt=hp_t2
(youtube: http://www.youtube.com/watch?v=uKvQvWTZFWg)

and Christine O'Donnell is a complete moron: http://www.cnn.com/video/#/video/bestoftv/2011/08/17/exp.piers.christine.odonnell.cnn

Couldn't they please trade places? Based on those videos, wouldn't Anne Hathaway be a politician with three times the courage and intelligence of Christine O'Donnell?

For your interest, pieces of the transcript of the O'Donnell CNN video. Full credit to CNN here:
http://transcripts.cnn.com/TRANSCRIPTS/1108/17/pmt.01.html
(I won't ruin the Hathaway video by posting the transcript. click the video).

MORGAN: Christine O'Donnell ran for the Senate from Delaware. She's a Tea Party darling and yes, she infamously dabbled in witchcraft when she was in high school. She's also the author of a new book with the intriguing title, "Troublemaker."

And Christine O'Donnell joins me.

Christine O'Donnell, how are you?

O'DONNELL: I'm doing well. Good to see you, Piers.

MORGAN: I can't help but notice you did the sign of the cross as you sat down there. Was it -- is it because you're nervous about the interview? Or --

O'DONNELL: No, I did it off camera. I didn't realize you were watching. I do that just because ever since my very first TV interview, I just pray. You know, and ask for God's blessing on what I'm about to say.

MORGAN: Well, I got relieved. I was expecting some kind of devil worshipping sign.

(LAUGHTER)

MORGAN: Look, here's your book, "Troublemaker." And what I was struck by is a little description on the back where -- it's a quote from you. "They call us wacky. They call us wing nuts. We call us the people."

I mean, I have met lots of people who are wacky and wing nuts. You can be both, can't you?

…

MORGAN: I'm sure you'll be thrilled about this. We're going to remind you of one of the self-inflicted wounds. So, have a little look at this.

(BEGIN VIDEO CLIP)

O'DONNELL: I dabbled into witchcraft -- I never joined a coven. But I did, I did.

UNIDENTIFIED MALE: Wait a minute, you are a witch? UNIDENTIFIED MALE: Yes, she was a witch.

UNIDENTIFIED MALE: Wait a minute. If you were a witch, you are going to --

O'DONNELL: I was a witch. That's exactly why.

UNIDENTIFIED MALE: How can you be a witch?

O'DONNELL: Because I dabbled into witchcraft. I hung around people who were doing these things. I'm not making this stuff up. I know what they told me they do. I mean, one of my dates -- my first date --

(CROSSTALK)

UNIDENTIFIED MALE: Wait. I want to hear about this.

O'DONNELL: One of my first dates with a witch was on a satanic altar and I didn't know it. I mean, there's little blood there and stuff like that.

UNIDENTIFIED MALE: Your first date was in the satanic altar?

O'DONNELL: Yes. We went to a movie and like had a midnight picnic on a satanic altar.

(END VIDEO CLIP)

MORGAN: My first date was in a satanic altar with blood there. What were you thinking?

O'DONNELL: Did Bill Maher pay you to rerun his show?

You know, well, at the time -- at the time as I, again, painstakingly detail in the book, it was a different time in my life and perhaps I was a little too candid for television. But my goal wasn't to go on the show just for the sake of going on national television. I went on the show to try to reach a younger audience with a message that, you know, when I was 16, by the way, this was 25 years ago, you know, I too was trying to find my way in the world and ultimately I did.

And, you know, people have said -- do you regret making those comments?

And I go into detail about what my thinking was. But the more self-inflicted wound was how we chose to respond and the ad was a big mistake.

MORGAN: Well, that brings me -- that brings me neatly to --

O'DONNELL: Oh, don't tell me you're going to play that ad.

MORGAN: I'm afraid we are. Yes. So, let's have a look at how you made a small problem 10 times worse. (LAUGHTER)

(BEGIN VIDEO CLIP)

O'DONNELL: I'm not a witch. I'm nothing you've heard. I'm you.

None of us are perfect but none of us can be happy with what we see all around us. Politicians who think spending, trading favors and backroom deals are the way to stay in office. I'll go to Washington and do what you would do.

I'm Christine O'Donnell, and I approve this message. I'm you.

(END VIDEO CLIP)

MORGAN: You see, the weird thing to me watching those two clips is on the first clip, you seem like a fairly naive -- you don't me mind saying -- slightly silly young woman who is having a bit of fun about witchcraft.

O'DONNELL: Right.

MORGAN: In the second one, you look like a witch. You look really creepy.

….

O'DONNELL: We need to address sexuality with young people. And masturbation is part of sexuality, but it is important to discuss this from a moral point of view.

The Bible says that lust in your heart is committing adultery, so you can't masturbate without lust.

The reason you don't tell them masturbation is the answer to AIDS and all these other problems that come with sex outside of marriage is because, again, it is not addressing the issue.

(END VIDEO CLIP)

MORGAN: That was from the MTV special "Sex in the '90s."

I'm about to ask you a question I don't ask most of my guests, I have to be honest with you. Do you still think masturbation is wrong?

O'DONNELL: Let's not even go there.

MORGAN: Why? You went there.

O'DONNELL: Well, again, like I said, I address it in the book. At that time in my life, my goal was to reach out to young people and there was a show "Sex in the '90s" on MTV where it pretty touted the philosophy that anything goes. And, you know, there's no doubt I don't think anyone would disagree that there's a little bit of a crisis when it comes to whether it's AIDS or sexually transmitted disease or teenage pregnancies.

So, my goal at the time was to reach out to young people and try to present a view of sexuality that they weren't getting. And again I go into detail about where I was at that time in my life and why I chose to go on that show and do that interview.

MORGAN: I get all that. I mean, your views on sex and stuff are relevant if you're going to be a politician.

O'DONNELL: Well, they're not because there aren't laws outlawing sex. And if there are, they should be on the local level, as I make the case for local control as opposed to federal control.

MORGAN: So, am I right in assuming your views have evolved over the years?

O'DONNELL: Well, I am a practicing Catholic and I support what the Catholic Church teaches. But, you know, would I as a -- I was about to say my age, but as an older woman, go on that show again, no. I wouldn't go on that show again and nor would I choose to do an interview about that subject again.

Again, it was a different time in my life. I was -- I was excited and passionate about this new belief that I had, this new faith that I found. I was eager to share it with my peers.

MORGAN: Are you still a supporter of total abstinence even if you are on your own?

O'DONNELL: Are you the pro-masturbation talk show host?

(LAUGHTER)

MORGAN: Yes. Why not? Yes.

O'DONNELL: Good for you for taking that stand. You know, right now --

MORGAN: If the option is to be the anti, I think I'd be in the pro department, yes.

(LAUGHTER)

O'DONNELL: OK. MORGAN: And I'm not afraid to say so. So, over to you, Ms. O'Donnell.

O'DONNELL: Well, what I'm going to do and what my goal is now is to fight for the freedom of speech in America that allows to you say that. I mean, that's what's my focus right now is to fight for the constitutional principles that made our country great because we do have a movement in Washington that is completely abandoning it.

MORGAN: Can I ask you, have you -- have you committed lust in your heart and therefore adultery?

O'DONNELL: Let's not even go there. Let's get the conversation back to the book. That's why I'm here.

MORGAN: Yes. But this is -- to me, it's a natural extension to ask you, for example, a very relevant question of any politician. For example --

O'DONNELL: I address it all in the book.

MORGAN: -- what is your view of gay marriage, for example?

O'DONNELL: I address that stuff in the book.

MORGAN: You can't -- you're on here to promote the damn book. So, you can't keep saying it's all in the book. You got to repeat some of it.

O'DONNELL: I'm here to talk about the book.

MORGAN: Yes. I'm talking about the book. You keep saying it's all in the book. So, tell me what's in the book.

O'DONNELL: Well, why don't you ask me questions about what I say in the chapter called "Our Follower in Chief" where I criticize Barack Obama? You know, why don't we talk about --

MORGAN: Because right now, I'm curious -- right now, I'm curious about whether you support gay marriage.

O'DONNELL: You're borderline being a little bit rude. You know, I obviously --

MORGAN: Really?

O'DONNELL: -- I obviously want to talk about the issues that I choose to talk about in the book.

MORGAN: Do you answer that question in the book?

O'DONNELL: I talk about my religious beliefs, yes. I absolutely do.

MORGAN: I mean, do you talk -- do you talk about gay marriage in the book? O'DONNELL: What relevance is that right now? Is there a piece of legislation? I mean, I shouldn't be voting on anything.

MORGAN: It's obviously one of the most -- it's obviously, as you know, because Michele Bachmann's views and others, it's obviously a highly contentious political issue. I'm just curious what your view is.

You keep saying it's in a book. So, I'm bemused as to why you wouldn't just say it in an interview if it's in the book?

O'DONNELL: Because I don't think it's relevant. It's not a topic that I choose to embrace. I'm not championing it right now. I've been there, done that, gone down that road.

Right now, what I'm trying to do is to promote a book that I hope to be a very inspirational story to people who are part of the Tea Party movement so that they can continue, you know, in this movement to bring America back to the second American Revolution. That's my goal. That's my focus right now.

MORGAN: So, would you agree with Michele Bachmann that we should maybe repeal "don't ask, don't tell"? You should restore that?

O'DONNELL: I'm not talking policies. I'm not running for office. Ask Michele Bachmann what she thinks. Ask the candidates who are running for office what they think.

MORGAN: Why are you being so weird about this?

O'DONNELL: I'm not being weird about this, Piers. I'm not running for office. I'm not promoting a legislative agenda. I'm promoting the policies that I lay out in the book that are mostly fiscal, that are mostly constitutional.

That's why I agreed to come on your show. That's what I want to talk about.

I'm not being weird. You're being a little rude.

MORGAN: I'm baffled as to why you think I'm being rude. I think I'm being rather charming and respectful. I'm just asking questions based on your own public statements and now what you've written in your own book. It's hardly rude to ask you that surely.

O'DONNELL: Well, don't you think as a host, if I say this is what I want to talk about, that's what we should address?

MORGAN: Not really, no. You're a politician.

O'DONNELL: Yes. OK. I'm being pulled away. You know, we turned down another interview for this.

MORGAN: Where are you going? You're leaving?

O'DONNELL: Well, I was supposed to be speaking at the Republican women's club at 6:00, and I chose to be a little late for that not to be -- you know, yes, not to endure rude talk show hosts, but to talk to you about my book and to talk about the issues that I address in my book. Have you read the book?

MORGAN: Yes, but these issues are in your book. That's my point. You do talk about them.

O'DONNELL: OK. All right. Are we off? Are we done?

UNIDENTIFIED MALE: He's still there.

MORGAN: I'm not. I'm still here.

UNIDENTIFIED MALE: He says he still wants to talk to you.

MORGAN: It would appear that the interview has just been ended.

S&P Downgrade Nuances

noreply@blogger.com (Trevor F) — Sat, 13 Aug 2011 19:36:00 +0000

Credit to someone else for this argument - I don't remember who, sorry!

Many people have been flipping about the S&P downgrade. This is understandable. It's a big deal. Many people have been arguing about whether it's justified, and from that perspective, it's far more complicated.

S&Ps ratings, to my knowledge, measure only the probability of a default event. Unlike some other ratings agencies, they do not consider severity, duration, recoverability, or anything else - only probability of a default event. From that perspective, given the drama that just went on (which is attributable to both sides, this was bipartisan stupidity), how can we be considered AAA when we were days away from default and it could happen again?

We probably don't deserve AAA anyway if inflation risk is accounted for along with severity, etc, but that's more debatable

Last Night’s Debate

noreply@blogger.com (Trevor F) — Fri, 12 Aug 2011 19:03:00 +0000

http://www.thebigquestions.com/2011/08/12/last-nights-debate/

Steven Landsburg ranks the eloquence of Republicans in the debate.

Does anybody notice that the best speakers tend to be the least ideologically complex and intellectually nuanced? Huntsman and Pawlenty have real opinions, whereas Santorum and Cain are close to ideological standins. The simpler the message, the easier to communicate... but is simplicity of message really a quality to look for in a politician?

As a disclaimer, I'm a big Huntsman fan, personally, and I'm not a big Palin or Santorum fan. I like candidates both near the top and at the bottom of that list. But I'm not sure this is a good thing to be voting based on.

Initial Reaction to the Debt Ceiling Bill

noreply@blogger.com (Trevor F) — Mon, 01 Aug 2011 18:40:00 +0000

I've been reading details about the debt ceiling bill that's been agreed to by most of the moderate congresspeople and is expected to pass.

Basic details as I understand them, cutting the politically symbolic stuff (balanced budget amendment, etc) -

Stage 1: Functionally, a 900 billion debt ceiling increase. 917 billion in cuts over the next 10 years, mostly backloaded. This is 50% defense cuts, and the rest is mostly discretionary spending cuts, but it does not cut a number of programs popular with progressives. Medicare providers will take a hit, as well.

Stage 2: Another 1.2 trillion debt ceiling increase. Could go higher, up to 1.5 trillion based on a) a balanced budget amendment that won't happen or b) if the reduction in the next part exceeds 1.2 trillion, but for now, likely 1.2 trillion. A bipartisan, bicameral Congressional panel must identify 1.2 trillion in deficit reduction (from taxes or cuts) and submit it for passage. If it's not passed, it comes out evenly from defense, discretionary programs excluding stuff popular with progressives, and payments to Medicare providers, up to a 2% cut in Medicare payments.

Impressions:

1) all future deficit recommendations are relative to "current law", so the Bush tax cuts expiring is considered baseline. It will make extending the Bush tax cuts a tax "cut" by definition of the committee, and makes them less likely. This strikes me as a victory of proponents of letting them expire - it's a way to raise taxes without having to say you raised taxes.

2) The real compromise here is that the Republicans didn't have to raise taxes and set the size of spending cuts, but Democrats functionally got to entirely design the composition of spending cuts, conditional on their size. The cuts are backloaded into out-years, exclude a bunch of welfare state programs (including social security, medicaid and actual welfare), and 50% of all cuts come from defense while barely touching entitlements.

3) It's going to be difficult to get the committee's recommendations passed, realistically. The committee will almost certainly look at tax reform - eliminating deductions in exchange for lower marginal rates, ultimately creating something revenue neutral. The committee will also probably look at entitlements - Social Security, Medicare, Medicaid, etc. Most Democrats won't vote for this, when the alternative is to have 50% of further cuts come from defense, and mostly spare entitlements.

So in my opinion, the best way to look at this deal is:

1) Bush tax cuts probably expire.

2) Defense spending slashed about 30%.

3) Medicare spending is slashed 2%

4) Discretionary spending on non-progressive departments is cut 30% - this is places like agriculture, energy, epa, etc.

5) No tax reform, no entitlement reform (social security, medicaid, medicare)

A lot of people are trying to call this a "huge Republican win". I disagree. This was a real compromise - numbers 1, 2 and 5 strongly favor Democrats.

I do hope that tax reform can get done, but I'm not optimistic.

I'm happy the debt ceiling was raised and I'm happy about a number of the spending cuts (both defense and discretionary), but excluding entitlements is a big deal, and tax reform remains an important piece for me. I'm neutral to slightly positive on this.

The Debt Ceiling and Oil Prices: An Explanation

noreply@blogger.com (Trevor F) — Tue, 26 Jul 2011 18:01:00 +0000

A friend wrote:

"can you please explain this to me?

http://oilandglory.foreignpolicy.com/posts/2011/07/24/the_big_bets_that_the_debt_fiasco_will_raise_oil_prices
"

There are a few different factors here, but to keep things simple I'll explain the primary one; if you'd like to know about others, just ask.

The main point here is that US debt is considered the least risky security in the world (it's frequently called a "risk-free" security, though that's a technical term for default risk, not a general term for actually having no risk. And, as we're seeing now, it's still possible for us to default).

Because US debt is the least risky security in the world, it's held by a LOT of people and organizations - banks and insurance companies use it to back their liabilities, corporations use it to store their extra cash, individuals who want something low risk use it for investment, China uses it to manipulate their currency prices to make Chinese investment/manufacturing grow, etc. In fact, there is so much US debt and US debt is so useful that there's actually a lot of demand for dollars from other currencies so that foreigners can buy US debt - Japan, Britain, China and other places hold vast quantities of debt, and that ignores all the foreign banks and insurance companies that use it.

If the US defaults or faces a downgrade in its credit rating (a measure of its risk) because the long term projected path of the deficit is too high, then a lot of the holders of that debt will either not want to hold US debt anymore, or will be contractually prohibited from holding it. The demand for US dollars to buy US debt would drop a lot, and less demand for US dollars means a weaker currency. A weak currency means our exports look cheaper to the rest of the world, so the rest of the world consumes more of our stuff, and imports get more expensive in dollars - it takes more dollars to buy them. We import a lot of oil, so a weaker dollar means that oil prices in dollars go up (it takes more dollars per unit of oil because the dollar is weaker). So betting on the prices of commodities that we import is a way of betting on a weaker dollar in the short term. (In the longer term, a lot more affects commodities prices than just the strength or weakness of the dollar).

Why the Regressivity of Smoking Taxes shouldn't bother us

noreply@blogger.com (Trevor F) — Thu, 30 Jun 2011 14:08:00 +0000

I’m surprised I’m writing about this, because smoking taxes seem uncontroversial. But I’ve had 2 people argue against cigarette taxes to me in the last month on the basis of their regressivity, so I figured I’d address them.

Smoking taxes are indeed regressive – they hit poor people at higher rates than rich people because more poor people smoke than rich people. Largely, we aim for progressive taxes, where rich people pay more because they can afford to.

I’m not convinced that this analysis matters when it comes to cigarette taxes. A high regressive tax rate only results in negative effects if:

1) The activity being taxed is implicitly or explicitly a good and productive (or at the very least, necessary) activity (ie, work, consumption, savings, estate generation, etc). This is true for all taxes. The types of activities for whom regressive taxes are even worse than normal taxes are those where, holding the amount of an activity constant, we want everybody to do a little of it – like savings – and regressive taxes are more ok when, holding the amount of an activity constant, we’d prefer a few people to do a lot of it – like, arguably, smoking.

2) The activity being taxed is potentially more productive than the marginal activity the government would spend it on (or, probably more theoretically accurately in the long term, the least productive activity the government would still spend on if instead of taxing, it rerouted spending away from its least productive activities). Again, how the behavior is distributed matters here.

3) It cannot be avoided by switching to behavior that is equal or better in cost or desirability. This is rarely the case, but if it is, the impact of the tax doesn’t matter at all.

Disincentivizing smoking is a good thing, not a bad thing, so there is no incentive effect (from 1), and it’s something we’d strictly prefer fewer people to do in higher volume because of declining health returns to scale of smoking (which I admittedly assume). While our government is unbelievably bloated, it’s hard to see very much government spending as actually producing negative returns if you subtract out the tax effects (There are arguments for certain ethanol and energy subsidies, but even then, cheaper goods are usually good things).

Smoking is also voluntary, and switching to not smoking is desirable, not undesirable, so it fails on 3.

You could even make cigarette taxes unregressive by offsetting them with income tax cuts at low income levels, and that still makes them worth pursuing. This implicitly happens already – if there weren’t cigarette tax revenues, those tax revenues would eventually have to be made up somewhere.

Going to Mars - Couldn't agree more

noreply@blogger.com (Trevor F) — Wed, 29 Jun 2011 14:04:00 +0000

http://www.cnn.com/2011/OPINION/06/29/zubrin.mars/index.html?hpt=hp_t2

“America's human spaceflight program is now adrift. On July 8, the space shuttle is scheduled to make its final flight, and the Obama administration has no coherent plan for what to do next. Instead, as matters stand, the United States will waste the next decade spending $100 billion to support an aimless constituency-driven human spaceflight effort that goes nowhere and accomplishes nothing [TF Note: It accomplishes something if it makes human spaceflight significantly cheaper so that more people can do it more regularly – maybe even for commercial purposes. But that doesn’t detract from the rest of this article]. For NASA's human exploration effort to make any progress, it needs a concrete goal, and one that's really worth pursuing. That goal should be sending humans to Mars.

…

Uniquely among the extraterrestrial bodies of the inner solar system, Mars is endowed with all the resources needed to support not only life but the development of a technological civilization. For our generation and those that will follow, Mars is the New World. We should not shun its challenge.

And we are ready. As I show in detail in my just updated book, "The Case for Mars," we are much better prepared today to send humans to Mars, despite its greater distance, than we were to send men to the moon in 1961, when President John F. Kennedy started the Apollo program. We got to the moon eight years later.

…

There is nothing required by [his] plan that is beyond our technology.

The issue is not money. The issue is leadership. NASA's average Apollo-era (1961-73) budget, adjusted for inflation, was about $19 billion a year in today's dollars, only 5% more than the agency's current budget.

Yet, the NASA of the '60s accomplished 100 times more because it had a mission with a deadline and was forced to develop an efficient plan to achieve that mission and then had to build a coherent set of hardware elements to achieve that plan. If President Barack Obama were willing to provide that kind of direction, we could have humans on Mars within a decade…”

Not from the Onion

noreply@blogger.com (Trevor F) — Mon, 27 Jun 2011 17:55:00 +0000

A dating site that only accepts beautiful people has had to remove 30,000 people who were admitted because of a computer virus... This literally sounds like The Onion. I decline to give the site publicity, so I won't mention its name here. In other news, I may have to move to Sweden.

http://www.guardian.co.uk/lifeandstyle/2011/jun/20/dating-website-beautiful-people-members

my favorite quotes:

"We have to stick to our founding principles of only accepting beautiful people – that's what our members have paid for," said Greg Hodge, managing director of [the site]. "We can't just sweep 30,000 ugly people under the carpet."

…

"We got suspicious when tens of thousands of new members were accepted over a six-week period, many of whom were no oil painting," Hodge told the Guardian.

The brutal axing of the 30,000 hopefuls is not the site's first brush with controversy. Last year, about 5,000 members were removed from the site after they had appeared to put on weight during the Christmas period.

…

This month, the website triggered anger in Ireland when it said that Irish men were among the ugliest in the world. This was based on the reasoning that only 9% of male Irish applicants to the site were accepted. Only 20% of Irish women are accepted, compared with nearly 70% of Swedish women who sign up.

…

Conceding that the latest set back was a "very embarrassing day", Hodge said he felt "very sorry" for the "unfortunate people who were wrongly admitted to the site and believed, albeit for a short time, that they were beautiful".

How is this even remotely anti-trust compliant?

noreply@blogger.com (Trevor F) — Wed, 15 Jun 2011 13:44:00 +0000

http://money.cnn.com/2011/06/15/technology/apple_kindle/index.htm?iid=Popular

“In less than three weeks, Apple plans to begin enforcing new iTunes App Store rules prohibiting apps that include "external mechanisms for purchases ... such as a 'buy' button that goes to a web site to purchase a digital book… Its goal is to steer more of the revenue stream for content purchases through Apple's own in-app payment system, which typically nets Apple a 30% cut of the sales.”

Now read this: http://en.wikipedia.org/wiki/Sherman_Antitrust_Act#Provisions

Regardless of legal interpretation… by intent, this type of behavior should not be condoned under Antitrust…

Questions that confused me today

noreply@blogger.com (Trevor F) — Tue, 14 Jun 2011 18:45:00 +0000

It is legal in the United States to pay for gametes - sperm and eggs - with the purpose of allowing infertile people to procreate. Adoption is also legal. But it's illegal to sell a baby. This makes no sense. I don't mean selling a child in terms of "ownership" of the child, I mean selling a baby to allow the baby to be raised as a child by the buyers. Why is this logical? Gametes have no purpose other than making babies, so materials solely for making babies can be sold, but babies can't? Is there any other example of this anywhere in the US? Certainly some drugs can't be sold, but materials for making drugs have other potential legitimate uses, and those that don't are generally illegal. Even the stuff sold in drug paraphernalia shops can be used for smoking tobacco.

Refuting obvious argument number 1: you could quite easily ensure that the baby has to be sold before birth or within a short time after birth, so that the baby doesn't connect to the biological parents and is raised entirely by the new parents. This avoids the cruelty of selling a 10 year old with connections to his/her family.

Political Hiring

noreply@blogger.com (Trevor F) — Wed, 25 May 2011 17:19:00 +0000

Does anyone else have an issue with the fact that the IMF is on the verge of putting a lawyer in the top seat just because a large European contingent wants a European there, a large feminist contingent want a woman there, and Lagarde is the only European woman even remotely close to the IMF?

The scope of the problems that the IMF is going to have to solve over the next ten years are HUGE. DSK may have been a misogynist douche, and he may have been a borderline socialist (center right of the left party in France), but he was, at the very least, an economist, and understood a lot of the issues faced by economies among a world filled with asset bubbles fueled by an overextension of the Asian growth model. He'd apparently been very, very effective in his leadership.

Christine Lagarde is an antitrust and labor lawyer, which is the exact OPPOSITE of the perspective needed at the IMF right now – they need to promote business investment and growth in the developed world, and consumption growth in emerging economies – both of which are undermined by the aims of most labor and antitrust lawyers.

This is a classic political hire – reminds me of the Drew Faust and Jane Mendillo hires at Harvard, post-Larry Summers. Summers was controversial, and then said something perceived as sexist, so the university made a conscious effort to hire people who were a) women and b) would not be even remotely controversial, either in terms of their appointment or in how they would run things.

The results have been objectively awful. Harvard has had a massive operating budget deficit that would have never happened under Summers (who wouldn't have allowed the idiotic tripling of bureaucratic positions that can't be eliminated and the overextension of financial aid), and a drop in endowment value of 35% with simultaneous major timing errors in investment (that were OBVIOUS and easy to avoid), and significant Asset-Liability mismatch (contributing to the operating budget deficit… seriously, do you know how badly you have to botch AL matching to have a 250 million deficit when you had a 34 billion dollar endowment and a 1.1billion operating budget? Even if the endowment was restricted and only a fifth of it was general use… remotely intelligent budgeting on Faust's part and standard risk control by Mendillo would have avoided any sort of budget crisis).

The difference between Harvard and the IMF is that Harvard can survive mismanagement much more than the world can survive a mismanaged IMF.

It's as I keep saying to the people who want to beat on Bill Belichick for not taking a pass rusher – if the ideal candidate doesn't exist, you can't manufacture them. Take the people you have available and pick the most talented. Based on her background, I have trouble believing that Christine Lagarde is that candidate. Seriously, pick an economist, or at least an industry practitioner!

Yes, I know I've been a little unspecific about her particular views, but I have read a lot of interviews with her, and I don't agree with a lot of what she says – I disagree with her on her financial regulatory approach, she's trying to impose a financial transaction tax that makes absolutely no sense, she thinks that volatility caused by speculators is a major factor undermining the euro, she has a MAJOR chip on her shoulder about what she sees as "testosterone fueled" economic developments (keep your identity small!), she underestimates labor mobility in financial markets – as you'd expect from a French labor lawyer, she plays politics with irrelevant notional values of derivatives, she wants to replace the dollar as the world's reserve currency (which would be good for the US, in my opinion, but holy crap, a stupid idea right now, especially given the Euro crisis!)… etc.

(I understand that some of these views may be controversial. They're entirely mine and don't represent that of my firm, my family/friends, or anybody else)

Optimism vs overoptimism

noreply@blogger.com (Trevor F) — Mon, 16 May 2011 00:23:00 +0000

http://www.nytimes.com/2011/05/15/opinion/15Sharot.html?_r=1&hp

My friend Madison posted this. I felt the desire to respond.

The issue I have with studies and articles like this is that while people overestimate the positivity of their own outcome, they probably underestimate their own ability to DEAL with bad things or less-than-optimal things that happen to them - this is largely driven by personality. For example:

http://feedproxy.google.com/~r/bakadesuyo/~3/44Ff7Bcp2O8/why-are-we-so-bad-at-predicting-our-future-ha

Even if you are pessimistic (or realistic) about your chances of extreme success (either professionally, in marriage, or whatever else), you can still have an optimistic bias if you believe you'll be able to handle that outcome alright. This may not be 100% true with health, but with most other things it probably is true.

I've been sporadic blogging recently, I know. I have a few ideas for future posts but life is EXTREMELY busy with the album and other stuff... but I'll be back ( :

Showing Support for Adam Foster

noreply@blogger.com (Trevor F) — Thu, 12 May 2011 17:40:00 +0000

http://www.cnn.com/2011/WORLD/meast/05/12/uae.american.detained/index.html?hpt=T2

Does anybody have any opinions on the best way to show support for Adam Foster in his situation?

And that's why you don't listen to the media for stock advice

noreply@blogger.com (Trevor F) — Tue, 10 May 2011 20:36:00 +0000

One of the things I was taught early on was to note what stocks the media thinks have bright futures, because they're very likely to underperform moving forward. This article, originally written in May, 2006, is a particularly extreme (and morbidly entertaining) example of this principle.

http://money.cnn.com/magazines/fortune/fortune_archive/2006/05/29/8378041/index.htm

What the heck is wrong with these parents?

noreply@blogger.com (Trevor F) — Thu, 07 Apr 2011 19:37:00 +0000

http://amfix.blogs.cnn.com/2011/03/24/parents-picket-girl-with-peanut-allergy-ask-her-to-withdraw-from-school/?iref=obinsite

Seriously… who PICKETS an ELEMENTARY SCHOOL STUDENT for the student’s HEALTH PROBLEM? Those parents should be absolutely ashamed of themselves. The kid didn’t choose to be allergic to peanuts…

Re: Lawyer oversupply

noreply@blogger.com (Trevor F) — Thu, 07 Apr 2011 18:14:00 +0000

A friend sent this article to me asking for my comment:

http://lawschooltuitionbubble.wordpress.com/2011/04/07/guest-post%E2%80%94lawyer-oversupply-does-producing-more-and-more-attorneys-result-in-better-prices-for-average-consumers-does-it-actually-help-the-new-lawyers-themselves-part-i/

I apologize if the format's a bit screwy- I wrote this last night and then edited it on the train this morning, and I don't blog from work, so I may not have got all the formatting right.

The overwhelming likelihood is that producing more lawyers isn't driving costs down because lawyers are choosing to do things other than law.

Legal fees aren't really "fixed costs". Court fees are, but lawyer's rates (per page or per hour) are not. Maybe the HOURS are fixed, but the cost per hour is not fixed. It's probably a little bit "sticky", as in once you're paying someone a certain wage per hour it's hard to cut their pay, but we're talking about young lawyers entering the industry, and they can be offered lower wages from the outset. This should result in a reduction of rates for the use of junior lawyers, which should save people money.

If legal fees aren't dropping, law firms do actually compete with each other on the basis of profits, and barriers to entry for law firms aren't that high, then that means that you don't have a flood of lawyers entering the marketplace. Which means they're not doing law – maybe they prefer to remain unemployed than take a lower salary because they think the salaries will come back up, maybe they are taking jobs in consulting or finance or management, whatever… but structurally, the argument you lay out isn't economically consistent with competition among law firms

Debt Ceiling

noreply@blogger.com (Trevor F) — Tue, 05 Apr 2011 14:40:00 +0000

I've been away from blogging for a long time. This will almost certainly continue. Some projects have been consuming my free time - work, CFA, taxes, investments, my album, some other stuff TBA - so I apologize. But last night, someone asked this, so I figured I'd post my response:

"Hey Trevor, I have a question:
http://www.reuters.com/article/2011/04/04/us-usa-budget-debt-idUSTRE7335BY20110404?pageNumber=1
They don't really say what the 'negative consequences' will be of hitting the debt ceiling (in the next month ish).
Higher interest rates = bad. Collapse of the US government and stock markets? What impacts will we see in daily life?"

Firstly, I should point out that the debt ceiling will be raised, almost guaranteed. I'll come back to this. Let's pretend it isn't. Projecting the consequences of this is like projecting what happens if a natural disaster happens or a WMD goes off - you can do your best, but there's enough chaos going on that there are bound to be unanticipated issues. That said, here's a stab at it:

It means the US will not be able to borrow more money. Think about what the US funds - Social Security, Medicare, the Military, implicit funding of states (which gets spent on infrastructure, medicaid, education, prisons, police/firefighters, etc) and cut all of it in half overnight. There's a decent chance we'd default on the debt because not paying China is politically easier than not paying Grandma's social security (though the consequences of not paying China would probably be way more damaging to Grandma in the long run anyway), though interest payments are only 10% of the budget so you'd still need to make massive cuts. A debt default would impair the economy for a long time because of the impact on interest rates. You'd probably also see a lot of states increase taxes significantly as the Federal government cuts back on aid to states.

I wonder if, in that scenario, the Fed would step in and start printing money to pay off debt - basically, causing massive inflation to solve the problem because it's the only thing that doesn't require congressional approval.

Thus, a lot of people would suffer, taxes would go up, you'd probably see inflation and the economy would not take it well. You know I think the government spends too much and want to see massive spending cuts, but this is because of a long term unsustainable budget structure, not an acute emergency in government repayment credibility (which would spike interest rates - we're not seeing that). These adjustments can't happen in large unexpected shocks - people need time to prepare and to understand what the policy changes mean so that they can be ready, and also so Congress can fix its screwups before they happen (as has been happening with a number of the provisions in Obamacare - the 1099 shuffle, the doc fix, etc - and Dodd-Frank - interchange, mortgage writing requirements, etc - to name two recent examples).

Anyway, all of that said, the debt ceiling will be raised because everyone understands we don't have a choice. It's political theater. It really is unbelievable, though, that in a government with a 1.4 trillion dollar deficit and a budget that's 3.5 trillion, Republicans (the so-called "spending cutters") are only targeting a 61 billion dollar spending cut while using the spending cuts opportunity to target completely unrelated social issues... and the Democrats (The "one marshmallow eater party") are crying foul and claiming we can only afford to cut 30 billion. The tone of debate among both parties is really discouraging.

A friend who worked at the DOE once told me that they have to prepare their budget 3 years in advance - and it's always "use it or lose it". Thus, they all got new computers and office furniture every year. Changing discretionary budgeting procedures to make them nearer term, more flexible and reduce the incentives to constantly ramp up spending would probably eliminate more discretionary spending than anyone currently thinks is possible. Of course, discretionary spending is only like 12% of the budget, but still, a 3% or 4% budget cut is significantly more than anyone's discussed so far.

(reference for the one marshmallow eater party: www.themoneyillusion.com/?p=9359)

The more things change...

noreply@blogger.com (Trevor F) — Sun, 30 Jan 2011 21:42:00 +0000

How reliable is the Christian Science Monitor? Because if this is actually a reasonable report...

http://www.csmonitor.com/World/Global-News/2010/1017/Germany-s-Angela-Merkel-Multiculturalism-has-utterly-failed

"German Chancellor Angela Merkel told a gathering of young members of her conservative Christian Democratic Union (CDU) party this weekend that the "multikulti" concept – where people of different backgrounds would live together happily – does not work in Germany.

At "the beginning of the 1960s our country called the foreign workers to come to Germany and now they live in our country," said Ms. Merkel at the event in Potsdam, near Berlin. "We kidded ourselves a while. We said: 'They won't stay, [after some time] they will be gone,' but this isn't reality. And of course, the approach [to build] a multicultural [society] and to live side by side and to enjoy each other ... has failed, utterly failed."

The crowd gathered in Potsdam greeted the above remark, delivered from the podium with fervor by Ms. Merkel, with a standing ovation. And her comments come just days after a study by the Friedrich Ebert Foundation think tank (which is affiliated with the center-left Social Democratic Party) found that more than 30 percent of people believed Germany was "overrun by foreigners" who had come to Germany chiefly for its social benefits.

The study also found that 13 percent of Germans would welcome a "Führer" – a German word for leader that is explicitly associated with Adolf Hitler – to run the country "with a firm hand." Some 60 percent of Germans would "restrict the practice of Islam," and 17 percent think Jews have "too much influence," according to the study."

Zero Marginal Product Workers

noreply@blogger.com (Trevor F) — Thu, 20 Jan 2011 15:34:00 +0000

There's been a lot of chatter between Tyler Cowen, Alex Tabarrok, Paul Krugman and Scott Sumner, among others, about the issue of what they call "Zero Marginal Product" workers.

http://www.marginalrevolution.com/marginalrevolution/2011/01/scott-sumner-on-zero-mp-workers.html
http://www.marginalrevolution.com/marginalrevolution/2011/01/zmp-and-sticky-wages.html

In the latter link, Alex Tabarrok wrote this:

"To see the latter point note that even within the categories of workers with the highest unemployment rates (say males without a high school degree) usually a large majority of these workers are employed. Within the same category are the unemployed so different from the employed? I don't think so. One reason employed workers are still fearful is that they see the unemployed and think, "there but for the grace of God, go I." The employed are right to be fearful, being unemployed today has less to do with personal characteristics than a bad economy and bad luck (including the luck of being in a declining sector, I do not reject structural unemployment)."

It's not hard to imagine a model in which labor demand renders workers as zero marginal product without actually requiring the individual workers laid off to be low quality. If a factory employs a janitorial staff of 20, and all are equally good, but the factory owner shuts down half of the production space (say it was a brick factory, or something else that's been very seriously structurally impaired). Just because none of the workers are themselves identifiably zero marginal product doesn't mean that 10 of them aren't - so you can have a job-positional zero marginal product rather than a worker-specific zero marginal product. The first janitor is very productive, the second is still productive but slightly less so, the 10th is slightly positive, and the 11th has shifted negative because of business needs. So the factory owner pulls 10 names out of a hat. There but for the grace of Heaven go I.

This is a largely more optimistic view than the worker-specific zero marginal product one, because as the economy picks up again, these workers stop being zero-marginal product without requiring significant new investment in human capital. Tyler definitely understands this, because he references this exact point, but I'm not sure Paul or Alex have thought that through. The very fair question of why hiring hasn't ticked up along with economic recovery is a pretty simple one, maybe too simple - hiring lags recovery because, for a while, you can increase the productivity of existing workers through technology and having people work harder, but eventually the recovery will be strong enough that people get rehired. These are things they've mentioned before, and I have too, but are worth reprinting here for relevance.