A conversation with Tyler Cowen

Conversation with Tyler podcast interview. Perhaps predictably, the most challenging interview / podcast I've ever done. Video here  and embed below 

Update:

My comments on efficient markets and active management provoked a lot of email. 

I mentioned Jonathan Berk, and should have mentioned his coauthors Rick Green and Jules Van Binsbergen, on how active management can persist even though investors don't make any money on it. The basic idea is really clever:  A manager has 5% alpha skill on $10 milllion, i.e. he can earn $500k, but the skill does not scale. So he earns 5%, charges 1% fee, investors get 4%.  Investors see his great performance and rush in.  Now he has $50 million assets under management. He still earns $500k. He charges 1% fee, and investors get zero alpha. It’s equilibrium – if investors leave,  alpha to investors goes up again, and they return. Investors are earning the same zero alpha they get on the index so why not. And that’s about what we see. Fees persist in equilibrium, fees are equal to alpha on average, alpha post fees are about zero, flows follow performance. The seminal paper is "Mutual Fund Flows and Performance in Rational Markets" Jonathan B. Berk, Richard C. Green  Journal of Political Economy 2004  112 1269-1295 and a series following, here . It's not a perfect theory, but the glass is nearer full than empty, and it's a lovely supply and demand starting place to understand an industry that persists for decades. 

More generally, the average fund earns no alpha, almost guaranteed by free entry. The trouble is distinguishing the good ones from the bad ones, on ex-ante characteristics. The filters used by academics are pretty weak -- past returns, ratings, education of principals etc. On the other hand, now we just move it all up to the meta-game. Picking managers is no different than picking stocks. Skill on skill, alpha on alpha, fees on fees...

Inflation outlook at NRO. 1970s all over again?

Essay on monetary policy in National Review Online. 

Short version: The Fed's monetary policy has returned to the intellectual framework of the late 1960s. At best "expectations" now float around as an independent force, manipulable by speeches, but not tied to patterns of action by the Fed as analysis since the 1980s would require. 

If you follow the conventional reading of how monetary policy works, that observation leads to a natural prediction:  we're on the verge of reliving 1970s inflation. (Fiscal policy, entitlements, regulation and cities seem to be headed also to 1970s policy on steroids.) 

True, the Fed says "we have the tools" to stop inflation should it break out. But that tool is to rerun 1980. Does the Fed have the will? Will the Fed really induce a 2 year agonizing recession to bring down inflation, followed by 15 years of historically unprecedented high interest rates? Or will the Fed do what it did three times before that -- half-hearted interest rate rises that brought milder recessions, and a quick backtrack? Having even a nuclear weapon is useless if people stop believing you will use it. 

I don't follow that conventional reading, so I'm not confidently predicting inflation. I worry more about fiscal affairs directly than about the Fed, which leads to a fear of a larger but less predictable inflation, that the Fed will have little power to stop. But mine is definitely a minority view.   

Does the Fed’s Monetary Policy Threaten Inflation? (Contains Spoilers)

The central bank is headed back to the Seventies — a rerun that no one should want.

Does the Fed’s monetary policy threaten inflation? By conventional measures, yes. But those conventional measures have failed in the past. I believe that the short-run danger is less than it appears, but the long-run danger is larger.

If one reads Fed statements through conventional glasses, monetary policy seems to have been reset to the 1960s, and we know how that worked out.

Hope at the NYT: Douthat on cancel culture

Ross Douthat in the New York Times doubts that canceling Dr. Seuss is a good idea. That this essay made it in to the Times, of all places, and as of 9 AM Monday he has not yet been fired may give us some hope. 

The most daring and revealing bit: 

Just a few weeks ago the Amazonian giant decided to simply delete, without real explanation, a 2018 book by Ryan Anderson, a Catholic scholar and the head of the Ethics and Public Policy Center, called “When Harry Became Sally: Responding to the Transgender Moment.”

...I live and work among highly educated liberals, and I know that more than a few of them actually agree with the critiques of current transgender theory Anderson presents. They’re skeptical about the widespread use of puberty blockers for gender dysphoria. They’re wary about the implications for women’s spaces, women’s sports. They don’t share Anderson’s Catholic presuppositions, but they are, at least, J.K. Rowling liberals.

In the last stages of the same-sex marriage debate, I never encountered a flicker of private doubt from liberal friends. But in the gender-identity debate, there are pervasive liberal doubts about the current activist position. Yet without liberal objection, that position appears to set rules for what Amazon will sell.

That this admission could be printed in the New York Times strikes me as good news for free speech. 

Let me be clear, as this is an explosive topic and I don't want my intent misconstrued. The question is not to judge anything about the gender-identity debate.  People I care deeply about lie on a trans spectrum, and I have learned a lot about their point of view. The question is whether public policy and medical or psychological fact on the issue can be discussed. Can evidence be sought, studies done, research discussed, books written and sold, and policy debated, actual science be performed? Can good progressives who work for the New York Times discuss these issues? Or is the current "activist position" on policy and medical issues undebatable? Nor is the issue, yet, legality of expression. Legality in a democracy only formalizes elite opinion. Amazon and Twitter censor first, law follows. Activists burn books first, law follows.  

Pay toilets and NYT: a free market microcosm

Nicholas Kristof in Sunday's New York Times asks a pressing -- often quite pressing -- question. Why are there no public toilets in America? He is right. He calls for a federal infrastructure plan to fix the problem: "Sure, we need investments to rebuild bridges, highways and, yes, electrical grids, but perhaps America’s most disgraceful infrastructure failing is its lack of public toilets."

Now, put on your economist hat. Or even put on your reporter hat. Ask the question why are there no public toilets in America? 

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GoodFellows interview with Ayaan Hrsi Ali

I learned a lot. The book is very interesting. Direct link in case the following embeds don't work.

 

 

What about work or starve?

 A young correspondent posed the following question: 

I was wanting to know your opinion on the “work or starve” argument often made my leftists. ...they’re essentially saying that the exchange between the [worker] and the employer isn’t truly voluntary since if the worker doesn’t have a source of income, they can’t live. What would be your objection to this..?

Essay contest for free-marketers. Here is my shot at it: 

First, someone has to work, or we all starve. So, if it is not going to be you work or you starve, it has to be you work or we send you to Siberia. If we are not actors in a market, we must be slaves to the state. Empirically, the incentive that the more you work the more you get has proved much more productive than appeals to patriotism, community sprit, the common good, or force.

Second, the best worker protection is competition. Many capitalists vying for your services in a free and open market is the best curb on one employer’s attempt to exploit its workers.  A good free marketer is always suspicious of the cronyism and protectionism of both capital and entrenched labor that pervades our economy.

Third, there is little objection to a robust safety net for those who are unfortunate so cannot work. Nobody starves,  not in the US, and not even in Libertarian Nirvana. But people who work harder, who apply their talents creatively in ways that serve their neighbors’ needs, do get to live a little better, to give them incentive to serve us all. 

Europe productivity -- and US too

 

 Source Stephan Schubert

Source: Chad Jones "straight out of the Penn World Tables, and I first learned about it from Lee Ohanian and Jesus Fernandez-Villaverde"

In the top graph you get the impression that German and French workers are using up to date technology, including both machines, firm organization,  opportunities to trade in a wide market, etc. but that they simply choose to, are incented to, or forced to work fewer hours than US workers. Italy and UK are still plodding along 20% or so inside the frontier.

The bottom graph points a bleaker picture. I'm not an expert, but if labor productivity is high and total productivity is low, that means that the productivity of other inputs must be atrocious.  Chad (amazing expert on all things growth) "It is stunning to me that Spain and Italy have had negative TFP growth for 20 years." 

I remember when real business cycles came out, and many were incredulous at the idea of negative productivity shocks. How can you forget how to do things? Well, maybe not for business cycles, but a society clearly can forget, and retrench. For centuries, remember, Italians looked up in wonder at the cupola of the Pantheon, the arches of the dry aqueducts, and wondered how they had been built. 

Source: Eli Dourado.  

Before you get all "go USA", let us not forget the largest economic disaster of our own times. These are all relative to the US. How is the US doing? Productivity slowed down suddenly, sharply, and it seems permanently around 2000. 

In the long run, nothing else matters. GDP buys you health, advancement of the disadvantaged, social programs, international security, and climate if you are so inclined. Without GDP, you get less of all.  Economic policy should have one central goal -- get productivity growing again, or (in my view) get out of the way of its growth. This is the one little hope that has not been let out of the policy Pandora's box, focused on everything else right now. 

Update: 

John Fernald and Bing Wang date the recent slowdown at 2003. The end of the first tech boom has something to do with it -- but why hasn't the second tech boom shown up in more productivity? 

Ed Prescott's famous Ely Lecture* looked at US vs. France and concluded high marginal tax rates reduced French working hours. 

Many commenters chalk it up to culture and a preference for leisure. I'm old enough to remember when French people worked Saturday mornings and chuckled at the lazy English who took the whole weekend off. An important work of social science on this question here.  

An excellent Vox Post by Fadi Hassan and Gianmarco Ottaviano on Italian productivity. Too much investment in the wrong places, not enough computers. I speculate also too-small companies. Labor laws, regulations and taxes make it desirable to stay small, private, family-run -- and thus local, non-financialized. 

*BTW, looking up the citation, I learned that the AEA canceled Ely of the Ely lecture, and renamed the lecture series. 

The puzzle of Europe

Here are two unsettling slides I made for a talk. Here is GDP per capita in US, UK, France and Italy and China (2020 dollars, source world bank) 

To make the comparison easier, here is each country not including China, divided by the US: 

Here are the 2019 numbers (in 2019 dollars, again World Bank) US: $65,297. UK $42,330. That's 35% less than the US. Or, the US is  54% better off than the UK.. France: $40,494. Italy: $33,228 That's 50% less than US. Or the US is 96% better off than Italy.  China: $20,261.

And it's been getting steadily worse. France got almost to the US level in 1980. And then slowly slipped behind. The UK seems to be doing ok, but in fact has lost 5 percentage points since the early 2000s peak. And Italy... Once noticeably better off than the UK, and contending with France, Italy's GDP per capita is now lower than it was in 2000. 

GDP per capita is income per capita. The average European is about a third or more worse off than the average American, and it's getting worse. 

What the heck happened? It could happen here too. Maybe it already has, just not as bad. 

This should be profoundly unsettling for economists.  Everyone thinks free trade is a good thing. The European union, one big integrated market, was supposed to ignite growth. It did not. The grand failure of the world's biggest free trade zone really is a striking fact to gnaw on. 

Sure, other things are not held constant. Perhaps what should have been the world's biggest free trade zone became the world's biggest regulatory-stagnation, high-tax, welfare-state disincentive zone. Still, "it would have been even worse" is a hard argument to make. 

Economists haven't been talking about Eurosclerosis for a while but I think we should. 

These are huge numbers. The worst estimates of climate change are 7% of GDP in 2100. And those are surely overstated (see the excellent new paper by José Luis Cruz and Estban Rossi-Hansberg) You may admire the NHS for saving money, but even if the 20% of GDP we spend on health care is totally wasted, we're still ahead.  Lots of people admire the European model. Just how far Europe is behind the US is remarkable -- and getting worse. 

(Follow up post on productivity) 

Goodman on single payer

With the current focus on "equity" and "disadvantage," even in the midst of a pandemic, one might yearn for the simplicity of a government run system. Surely if health care were free at the point of delivery, paid for by taxes, all the inequities of health care would disappear, no? (Sure we might all get bad health care, but we'd all get the same health care, no?) 

No. John Goodman has a nice Forbes article explaining why and giving the evidence from UK and Canada. Bottom line: Nothing is free. Everything is rationed. If it is not rationed by price, it is rationed by political access or personal connections. Markets are the great leveler, as anyone can get money but it's hard to get friends and connections. 

When Britain founded the National Health Service

It was often said "health care is a right." Aneurin Bevan, father of the NHS, declared, “the essence of a satisfactory health service is that rich and poor are treated alike, that poverty is not a disability and wealth is not advantaged."

30 years after the NHS began the Working Group on Inequalities in Health investigated and  

The Black Report found little evidence that the creation of the NHS had equalized health care access or health care outcomes at all. Here are the words of Patrick Jenkin, secretary of state for social services, in his introduction to the report: 

“It will come as a disappointment to many that over long periods since the inception of the NHS there is generally little sign of health inequalities in Britain actually diminishing, and in some cases they may be increasing. ..”

.. 30 years after Britain had nationalized its health care system and replaced private care with public care, it appears that inequalities in access to health care and health care outcomes were not any different than if the NHS had never been established at all!

r < g

r<g is an essay on the question whether r<g means the government can borrow and not worry about repaying debts. No. 

Abstract:

A situation that the rate of return on government bonds r is less than the economy's growth rate g seems to promise that borrowing has no fiscal cost. r<g is irrelevant for the current US fiscal problems. r<g cannot begin to finance current and projected deficits. r<g does not resolve exponentially growing debt. r<g can finance small deficits, but large deficits still need to be repaid by subsequent surpluses. The appearance of explosive present values comes by using perfect-certainty discount formulas with returns drawn from an uncertain world. Present values can be well behaved despite r<g. The r<g opportunity is like the classic strategy of writing put options, which fails in the most painful state of the world.

The essay is based on comments I gave at the spring NBER EFG meeting on Ricardo Reis' "The constraint on public debt when r<g but g<m." My discussion starts here at 4:48,  Ricardo presents the paper (very good, worth listening to, many points I didn't get to) at 4:30 

pdf for now, as translating equations to blogger is taxing. 

Fiscal theory of the price level draft

The Fiscal Theory of the Price Level is a book I'm writing on that topic. It now has a full draft, here. 

Comments, typos, suggestions, complaints, parts you find too easy, part you find too hard, things you think are wrong, parts you find repetitive, parts you find need better connection, things I should add, things I should delete are all most welcome! 

I also did a 2 hour video mini-course on FTPL for the Becker-Friedman Institute last summer, with slides/notes here. 

Update: The video link is now fixed (2/1/2012)

Econtalk on virus

About a month ago, Russ Roberts and I had a great conversation about virus, vaccine, and tests for the Econ Talk podcast, and the free market approach. It's out now, here for the podcast, or embedded below  and here video on YouTube. The podcast link already has some excellent comments. 

Lipson on basic decency

Why are people gloating over Rush Limbaugh’s death? Charles Lipson writes 

The gloating over Rush Limbaugh’s death ought to shock the conscience. That’s not a political statement. That’s a cri de coeur about how our basic sense of human decency has been warped by political differences.

To take one example, a Yale Law professor tweeted he wasn’t just happy Limbaugh had died, he was euphoric.

He’s not some drunk being carried out of a rowdy bar. He’s the Charles F. Southmayd Professor of Law and Philosophy at Yale Law School and the Director of Yale’s Center for Law and Philosophy. ...

The New York Times chose to write about Limbaugh's "Legacy of Venom:", "Weaponizing conspiracy theories and bigotry."  Could they not wait for his body to be cold? Or show less respect for the tens of millions of apparently deplorable fellow citizens who listened to him? 

This is not one more complaint about the woke left. This is a problem on both sides. 

Rush’s friends on the right are happy to claim the moral high ground when the left is degrading itself like this. But they only hold it for a moment. They act the same way when the opportunity arises. Do you think they would behave any better if a Nancy Pelosi was hit by a bus? Many would think it was the perfect time to share with the world how much they hated the Speaker, how glad they were to see her gone.

Quite a few expressed that view when invading the Capitol a month or so ago.  

Lipson's main point, and mine: 

The point here is not only that this behavior is despicable, though it is. The point is that so many people think their views are righteous and worth sharing with the world. That smugness and moral self-righteousness are signs of our political divisions and the moral decay they generate.

...

When prominent people celebrate Rush Limbaugh’s death they are, inadvertently, telling us something about the decay of our civic culture. They are showing that we are now behaving as if we are at war, a cultural and political civil war. In the process, we are losing our sense of respect for each other at a very basic level.

No one has the moral high ground here. Far too many take every fleeting opportunity to cry, ‘Vengeance is mine.’ That cry springs from battles that both sides now consider life-or-death. That is not how political differences should be contested in a constitutional democracy. That is not how people in tolerant, liberal societies treat each other. For those who say, ‘We are better than that,’ it’s time to show it.

Both sides of our partisan politics are acting as if this is a life or death battle, the point being to wipe the other side off the face if not of the earth, of our political life. As I have opined, if it is so, we need to change the winner take all rules of our game. 

My mother advised, if you don't have anything nice to say, don't say anything. George Shultz, who we have been remembering this week at Hoover,  would not have behaved this way, even on the death of a deep ideological opponent. "Show respect" was one of his watchwords. He did, even to the Soviets. 

Let's try to keep comments polite on this one. 

Institutional culture

Arnold Kling has an intriguing series of blog posts on the nature of universities and other institutions that are, as he says, cancel-bait. I removed the cancel-bait part and pass on his observation on the shift in institutional culture, visible in universities but also in corporate and nonprofit institutions and in our politics. 

1. The older culture saw differential rewards as just when based on performance. The newer culture sees differential rewards as unjust.

2. The older culture sought people who demonstrate the most competence. The newer culture seeks to nurture those who are at a disadvantage.

3. The older culture admires those who seek to stand out. The newer culture disdains such people.

4. The older culture uses proportional punishment that is predictable based on known rules. The newer culture suddenly turns against a target and permanently banishes the alleged violator, based on the latest moral fashions.

5. The older culture valued open debate. The newer culture seeks to curtail speech it regards as dangerous.

6. The older culture saw liberty as essential to a good society. The newer culture sees conformity as essential to a good society.

7. The older culture was oriented toward achievement. The newer culture is oriented toward safety. Hence, we cannot complete major construction projects, like bridges, as efficiently as we used to. 

Why? Well, he passes on a theory which I don't necessarily agree with, though I haven't read the cited book. The increasing politicization of all institutions of civil society is a different force that has a lot to do with the new culture. But the observations seem perceptive no matter what the reason. Academic economics certainly seems much more careerist than it used to be, more about who has what title and job than about who wrote what interesting new idea.  But maybe that perception is a sign of age. 

Vaccine math. $500 per shot?

I'm reading up on the $1.9 trillion "stimulus." This caught me eye:

 Biden's plan would set out $160 billion for a nationwide vaccine program that would help state and local governments get the vaccine into people's arms.

There are 328 million people in the US. $160 billion is just about exactly $500 per person. 

Now, I am of the view that the government should have spent a lot more on vaccines, testing, public health and so forth, given the $5 trillion and counting it has cost the government, and more in lots GDP, jobs, years of school and so forth. This is likely the least bothersome line in the bill. 

Still, has the US really gotten to the point of health care sclerosis and dysfunction that it costs $500 -- on top of money already allocated -- to give someone a shot?  

Test snafu

Wouldn't it be nice if there were a $5 test that works in minutes, and can find asymptomatic people who might transmit covid? Imagine how many schools, businesses, restaurants, weddings, churches, and so forth could safely open with such a thing. Imagine how much the reproduction rate of the virus could be crushed. 

There is! And it's sitting on shelves, one of the biggest casualties of the US federal monopoly on this simplest of all consumer goods. From detailed Wall Street Journal coverage: 

“Antigen testing is one of the most powerful tools we have to hasten control to normalcy,” said Richard Pescatore, associate state medical director at the Delaware Department of Health and Social Services...

The tests can quickly help determine whether someone is infectious. The tests detect cases by searching for pieces of proteins from the virus. They deliver results in minutes.

Among the first rapid antigen tests cleared by regulators was the BinaxNOW, which is made by Abbott Laboratories, costs $5 and doesn’t require any equipment.

Costs $5 to the federal government. Imagine if Abbott could send it to you via Amazon or ship it in bulk to Wal Mart. Alas, rather than simply sell the tests on the open market, the federal government is the monopoly buyer, shipped them to states, and they sit on shelves: 

The wages of stimulus

 

Discussing stimulus, a colleague passed along a factoid -- wages and salaries, he said,  are running $20 billion a month or $240 billion a year below where they should be. If the "stimulus" were to aim entirely to replace all lost wages due to the pandemic, that would stop at $240 billion, not $1.9 trillion. (My colleague is usually a pro-stimulus type.) I forgot to get the source, so I tried to recreate it. Here are some documented numbers, total compensation of employees, wage and salaries. 

Feb 2019 $9,228

Feb 2020 $9,659

Dec 2020 $9,675

These are billions at an annual rate. Actually, by these numbers Dec 2020 is already above Feb 2020! That doesn't account for inflation, or missing growth. If we want to entitle ourselves to the trend, wages should have gone up $430 billion. Ok, still less than $1.9 trillion. (My snarky comment: trends are earned slowly, not laws of nature. Trends in wages come from higher productivity, expanding businesses, greater labor force participation, lower unemployment.) 

One can argue for federal payments as insurance. Some people are definitely hurting, and some others are doing better. But the case for an overall "aggregate demand" shortfall seems weak. It is not always 1933. 

Inflation issues

 

In analyzing whether inflation is coming, Mickey Levy at Berenberg Capital passes along the above graph. These are price indices, so the upward or downward slope measures inflation. Is there inflation? That depends on whether you ask durable goods or services. 

Why are we experiencing durable good deflation, and will it last? Part of the answer is quality adjustment: 

A modest proposal for vaccine rationing

A mid-20s child of a good friend just got the vaccine. Why? He runs a micro-brewery, which his state deemed "essential," because it's "manufacturing." 

As the WSJ reports

After nursing-home residents and health-care workers, the CDC says priority should go to those over age 75 and an expansive list of “frontline essential workers.”,

...“essential workers” ... include those who “work in transportation and logistics, food service, housing construction and finance, information technology, communications, energy, law, media, public safety, and public health. 

media! Economics blogging should count, no? 

What happens when a good is rationed? It is given out politically. 

While many states have already given priority to police and firefighters, teachers’ unions are trying to cut to the front of the line and are blackmailing politicians by refusing to reopen schools. But teachers and child-care workers face less risk than other front-line workers since children are less likely to transmit the coronavirus. 

Other unions are also lobbying for priority. The SEIU lambasted California Gov. Gavin Newsom’s well-advised decision last week to remove “essential” workers such as janitors from the state’s priority guidelines and base eligibility almost solely on age. “It’s like he’s putting us out to die,” griped SEIU United Services Workers West political director Sandra Díaz. 

Industry groups including hotels, airlines and ride-share companies are also lobbying states to have their workers vaccinated first. Gov. Andrew Cuomo this week announced that restaurant, taxi and ride-share drivers would be next in line for vaccines. But why restaurant workers before retail workers or 60-year-olds?

The WSJ suggests rationing based on age. 

The modest proposal: Why not let "industry groups" decide when they want the vaccine based on...hold your breath.. paying a market price to get it?  I wouldn't dare whisper that maybe individual people could be allowed to decide when to get the vaccine -- that is what we're talking about, when, not if --  by deciding when they want to pay for it, as our political climate cannot say out loud that anything should be rationed by willingness to pay. But surely, we can agree that profit-making businesses should be allowed to pay to get their workers vaccinated sooner -- if it's really important to them to do so -- rather than just by who has more political connections to be labeled "essential." 

Fun: Rory Cooper tweets

Fairfax schools says they're going to open up 2 days a week in March for some kids. Wanna know how? They're hiring thousands of unskilled classroom monitors to watch kids watch computer screens because their fully vaccinated teachers won't return to the building. This is nuts.

 

Trading halts and game over

David Battan writing in the WSJ brings come clarity to Robin Hood's trading stop.  It raises some questions for me, however. Much of the problem seems to stem from two-day clearing and settlement, and brokers lending people money to trade. Instant settlement and at least separating the lending activity from the trading activity ought to help. The institutions are really stuck with relics of a pre-computer world, it seems. 

OK, first the facts, then speculation, and an invitation for commenters to correct me as I am not a master of these important plumbing issues. 

When clients trade, especially on margin, they use the broker’s money to play. Imagine a client buys 100 shares of GameStop for $400 a share, using $20,000 of his own money and borrowing $20,000 from Robinhood. If the stock drops from $400 to $120 (as it did on Jan. 28), the client’s position may be sold for $12,000 due to the margin violation, leaving Robinhood trying to collect an unsecured $8,000 debt from “u/Thicc_Ladies_PM_Me.” Good luck. Multiply this by hundreds or thousands of similar clients. Option trading is worse because the leverage is much greater. 

"Margin violation" means basically this: