Into the darkness they go, the wise and the lovely

Those of you who are acquainted with my writing on this blog probably know that (a) I study mortality risks, and (b) I sometimes comment on how these risks change when the clocks spring forward and fall backward.   This fall is no exception, as I have a piece in the venerable Costco Connectionmaking the case that maybe keeping Daylight Saving Time as is wouldn’t be the worst thing to happen to the world.  (I could have made the case the other way, as the policy decision here is very unclear, which tends to favor the status quo).

As per usual, the the remarkable Gaisma.com site shows us what’s at stake here in Appleton.  The break in the series starting in month 11 is upon us:

The Appleton Day

What does this mean for you?  Well, starting Sunday it is going to be dark at 5 p.m.  meaning that you are far more likely to get hit by a car at 5 p.m. next week than you are this week.   When I say “far more likely,” our estimate is that the risk is about three times as high!

Of course, you are also far less likely to get hit at 6 a.m. in the extremely unlikely event that you are out 6 a.m.  But, notice, but January 1 the sun won’t rise until after 7 a.m., and if DST was permanent, that would be 8 a.m.   Sunlight is the ultimate scarce resource.

Here is our previous coverage.

* The picture in the Costco piece is of me enjoying some daylight at Wrigley Field. Should Daylight Saving Time be eliminated? Of course not! More daylight means more daytime ball games.

Nobel Prize Agency

Simpsons
Oliver Williamson, Physicist?

This year’s Nobel Memorial Prize in Economic Sciences once again goes to some folks doing the heavy lifting on organizational theory.   You may recall that not too long ago, Elinor Ostrom and Oliver Williamson shared the award for their work on “governance mechanisms” — Ostrom on collective governance of natural resources, Williamson for organizational structure.

This year’s winners are Oliver Hart from Harvard and Bengt Holmström from MIT for their work on “contract theory”.    Contract theory is pretty encompassing, and includes the classic “principal-agent” problem, along with the “incomplete contracts” problem.

For the uninitiated, An agency problem arises when you as a principal delegate a task for some agent to carry out for you.  For example, you might own a business and hire someone (or someones) to work for you. That seems simple enough, except things can get all mucked up if output comes from a combination of effort and random factors, if you have several workers and can’t figure out who’s responsible for what (team production), if your workers have a bunch of things to do (multiple-task agency problem), and a host of other things.

Hart and Holmström have made fundamental contributions in getting to the heart of some of these matters, and were duly rewarded with the prize. Remarkably, Kevin Bryan from University of Toronto says that though Hart won the prize on the back of his contributions to “incomplete contracts,” he actually has not done much on incomplete contracts since two other Nobel winners — Eric Maskin and Jean Tirole, characterized the limitations of that approach:

Hart’s response, and this is both clear from his CV and from his recent papers and presentations, is to ditch incompleteness as the fundamental reason firms exist…. To my knowledge, Oliver Hart has written zero papers since Maskin-Tirole was published which attempt to explain any policy or empirical fact on the basis of residual control rights and their necessary incomplete contracts.

Professor Bryan has remarkably prescient characterizations of Hart and Holmström‘s work A Fine Theorem blog (incidentally, he often has excellent review and commentary on recent IO papers).   The post on Hart is essentially a short history of the economics of the firm and organizational economics, which many of you will be seeing next term in Econ 450.    There are a million other descriptions of their contributions (google it), including this critical piece by Arnold Kling.

And, congratulations to Milhouse!   Well done.

Quarterly Chartbook for the U.S. Economy

Interest rates and stock pricesInvestment analyst and former Lawrence professor Jeff Miller provides a weekly column entitled Weighing the Week Ahead  that employs many charts and offers an array of insights related to both the state of the U.S. economy and investment opportunities.  This week’s version provides a link to a quarterly chartbook assembled by JP Morgan that will give even the most numerate among us plenty of food for thought. One chart of particular interest to investors suggests that when 10 year U.S. Treasuries offer relatively low interest rates (e.g., below 5%), increases in their yield are correlated with increased stock returns.

 

Infrastructure Spending Is Not The Holy Grail

Politicians of all stripes (including Clinton, Sanders and Trump) seem to believe that more Federal spending on infrastructure is essential to increasing economic growth and creating attractive employment opportunities. In a recent lengthy article in City Journal, economist Edward Glaeser begs to differ. Glaeser, author of The Triumph of The City, recognizes that much of our infrastructure needs attention due to deferred maintenance, but that Federal money devoted to large scale infrastructure projects tends to be both inefficient and inequitable. Below are a summary of a few of his observations. I encourage you to read the entire article.

1. Many projects serve very few people; some have been described as “bridges to nowhere.”
2. Funding tends to follow political influence rather than economic need.
3. Most projects do not come close to passing any type of benefit-cost test.
4. Although projects in the late 1800s and the first half of the 20th century did lead to both increased productivity and employment, later 20th century projects and 21st century projects tend to generate neither increased productivity nor employment opportunities, especially for areas with high unemployment rates.
5. Consistent with point 2, many projects involve subsidies from poorer to richer parts of the country.
6. Both efficiency and equity would be improved if infrastructure projects, especially those related to transportation, were funded locally by users.

Economics 421 – Investments

Unfortunately, the catalog description for this course has not been undated to reflect the changes made last year (and this year.) Below you will the appropriate description.

ECON 421
Investments
This course blends a web-based course on investment philosophies with classroom discussion of economic and valuation principles. It aims for students to develop an understanding of contemporary financial markets and instruments as well as how economic fundamentals apply to the evaluation of investment alternatives and strategies. Students will apply such knowledge to craft their own economic philosophies and implementation strategies. Units: 6.
Prerequisite: I-E110 and at least one of ECON 300, ECON 320, and ECON 380.

The class is scheduled to meet Tuesdays from 9:50 to 10:50 and Thursdays from 9:00 to 10:50. I will NOT necessarily attend the Tuesday sessions; however, during reading period week, the class will meet from 9:00 to 10:50 (Tuesday, October 18th) as a replacement for the Thursday session.

If you have questions, please don’t hesitate to ask me or to come to the first session next Tuesday at 9:50.

Obamacare: Repeal and Replace vs. Reform

Republicans and Democrats are strongly divided over what should happen to the ACA. Most Republicans have identified the repeal of the Act as a high priority. Most Democrats seek to reform the Act by addressing gaps and errors in the legislation. Such a characterization of these battle lines is much too simplistic. In some cases, the proponents share the same goals but offer different strategies and policies to achieve them; in others, the proponents disagree about both goals and policies. This blog posting seeks to illuminate a few of these distinctions; more complete discussion can be found here.

Truth And Consequences 512

Goal #1 – Ensure access to health insurance for all Americans

Comment: Largely a shared goal
Republicans: Available tax credit to be used voluntarily with few restrictions.
Democrats: Expand participation in the ACA and provide more incentives to induce those not insured to become so.

Goal #2 – Reduce incentives to purchase expensive health insurance plans
Comment: Shared goal
Democrats: 40% excise tax on premiums above a prescribed level
Republicans: Premium above a prescribed level are subject to the income tax on an individual basis.

Goal #3 – Regulation of health insurance markets
Comment: Not a shared goal
Republicans: Deregulate to a large degree with few restrictions on insurers to induce more competition and range of health plan options.
Democrats: Strong pre-existing conditions clause prohibitions and state-based purchase and regulation.

Goal #4 – Choice of health plan
Comment: Largely a shared goal
Democrats: Encourage competition through the market place exchanges with provisions to counteract adverse selection; that is, risk corridors, re-insurance pools, and risk-adjustment used to assist private insurers who attract relatively high cost enrollees.
Republicans: Allow consumers to purchase in-state or out-of-state health plans they see as best meeting their preferences.

Goal #5 – Provide Medicaid for Low Income Residents
Comment: Largely a shared goal
Republicans: Federal block grants to the states with states having a great deal of flexibility in determining composition of plans as well as eligibility.
Democrats: Federal government largely determines both eligibility and a large portion of the benefits covered.

Since the ACA law covers well over 900 pages, many provisions are not addressed here. This posting seeks to illuminate where Democrats and Republicans might find common ground and where they are unlikely to do so. Furthermore, given the instability in the exchanges in many states, reform of the 3 Rs – reinsurance, risk corridors, and risk adjustment – will be a priority if the exchanges are to be stabilized and survive.

Fama & Thaler on the EMH

The Chicago Booth School gives us a spectacular interview with Eugene Fama and Robert Thaler on the efficient market hypothesis, the idea that prices reflect all available information.   

Thaler says he likes to parse this statement in two parts:  The first is whether you can individual investors outperform the market (doesn’t look promising); the second is whether prices are “correct” at any given point in time (I suppose it depends on what you mean).

The discussion is absolutely great, and you will learn a lot about economic modeling and thinking about testing economic models from two leading scholars who have thought a lot about it.   At one point, Fama somewhat hilariously (to economists, at least) declares himself to be “the most important behavioral-finance person, because without me and the efficient-markets model, there is no behavioral finance.”

Incidentally, the Booth school is also the source of the Initiative on Global Markets polls of economists, leading to the remarkable Which Economist are You Most Similar To? interactive tool.

 

 

Monetary Policy in an Age of Radical Uncertainty

Central bankers in all major developed economies have adopted NIRP, ZIRP, or near ZIRP policies.  The Bank of Japan and the European Central Bank now “offer” negative interest rates (NIRP) on reserves and project to do so for the foreseeable future.  The Bank of England and the Federal Reserve Bank of the United States remain committed to targeting interest rates slighted above zero (near ZIRP).  10 year government bonds offered by these countries range from -0.225% in Japan to -0.027% in Germany to 1.57% in the U.S. Such policies are not consistent with sustainable economic growth. See Professor Gerard’s previous posting on the pervasiveness of such interest rates.

In a recent book entitled The End of Alchemy, former Bank of England Governor Lord Mervyn King argues that the policies we have employed in the past (and present) to stabilize our economies – such as keeping interest rates low until economic growth returns to its long term rate or unemployment falls below some designated benchmark (full employment? natural rate of unemployment?) – are inconsistent with sustainable economic growth.  Furthermore, he suggests that central bank and regulatory policies adopted post Great Recession (December 2007 – June 2009 in the U.S.) fail to address the potential for a repeat of the financial failures witnessed during that period. Among other points, King observes the following (for more in depth comments on King’s insights go here.)

  1. In the contemporary world economy, many shocks to the economy are unpredictable; thus, one cannot use probability-based forecasting models to design policy to stabilize economies.  (King calls this radical uncertainty)
  2. Policies designed to stabilize economies in the short run, such as aggressive monetary and fiscal policies, leave a residue inconsistent with long run economic growth unless stagnation is viewed as the desired norm. For King, policymakers face the stark trade-off of short term stability for long term sustainable economic growth.  In contrast to Keynes, in the long run, we are NOT all dead.
  3. In contrast with central banks as “lenders of last resort,” King offers the innovative idea of “pawnbroker for all seasons” as a constructive substitute.  Banks would know in advance what their liquid assets will bring them in terms of central bank conversion to cash.

Each of the above points demonstrates how King views central banking and bank regulation in a world characterized by radical uncertainty.  In short, policy makers need to find viable coping strategies to reduce the downside cost of economic recessions in general and financial meltdowns in particular. With radical uncertainty, the “forward guidance” offered by central banks lacks credibility and fails to address such uncertainty.   In the words of Michael Lewis ( of Liar’s Poker, Moneyball and the Blind Side fame), “if his book gets the attention it deserves, it might just save the world.” (http://www.bloomberg.com/view/articles/2016-05-05/the-book-that-will-save-banking-from-itself)

Gladwell Claims There is No Free Lunch

In his latest Revisionist History podcast, Malcolm Gladwell gives us some food for thought about where we put our resources.  He claims that small liberal arts that develop gourmet-level dining services are doing so at the expense of bringing in  low-income students.  To develop his argument, he compares two elite schools from the northeast, characterizing the situation thusly:

They compete for the same students. Both have long traditions of academic excellence. But one of those schools is trying hard to close the gap between rich and poor in American society—and paying a high price for its effort. The other is making that problem worse—and reaping rewards as a result.

His logic is pretty straight forward: Schools have a budget constraint, and at the margin they can spend an additional dollar on financial aid or on campus amenities.  A school that invests in campus amenities will draw more students willing to pay a premium price, whereas a school that skimps (relatively speaking) on amenities in favor of financial aid will be at a relative disadvantage in two ways:  First, students generally prefer high-quality amenities to low-quality amenities. Second, it generates less revenue per student and therefore fewer resources to put into financial aid or campus amenities.

Malcolm Gladwell is an influential writer with best sellers to his credit such as Outliers and The Tipping Point, as well as about a million New Yorker articles, so this pieces is certain to make waves.  That he calls the investment in high-end dining services “a moral problem” and implores students not to go to schools with ridiculously good food pretty much ensures people will be up in arms about this.

This is also relevant from our perch here at a small liberal arts school with our own financial decisions to make.  I was more amused than convinced by the thesis when I first read the abstract, but after looking at the numbers and listening to Gladwell, I am more sympathetic (scroll down the Revisionist History page for the photo of a banana chocolate chip waffles with the school logo emblazoned in the center).   Though, I guess that’s why Gladwell is such a popular figure:  he makes an interesting claim, tells a good story, and makes a good case.

As an aside,  I think I speak for most people who attended a residential campus prior to 2000 when I say that the food even at campuses that “skimp” on quality is ridiculously good compared to what we ate (though I did love the Monte Cristo sandwich on Thursdays).

You can read more about it at the always lively Inside Higher Ed website.

Addendum:   It’s probably worth adding that it’s still okay to complain about food at your school.   You probably pay a lot of money for dining services, and with that, you expect certain levels of quality, variety, and availability.

A quick peek reveals that the average U.S. household (a.k.a., consumer unit) spends about $6,800 annually on food compared with college meal plans that run $2000-$3500 per semester.

Losing Interest

When I have the occasion to make a sizable consumer item — a house or a car or even a big green egg — I often will borrow some money to finance the purchase. In the past few years, the person extending the credit invariably tells me that interest rates are historically really low and you should lock in now because rates have to go up in the future.

Really?

Yes, of course.  How much lower could interest rates go?

Well, I was reading a White House report on interest rates (from July 2015) that had a figure that shows yields on 10-year treasuries have been on a downward trajectory for a very long time, like 20+ years.  Not only that, people who forecast such things have pretty much grossly overestimated future interest rates at pretty much every turn.  In other words, for the past 20 years people have been saying that interest rates “have to go up” and for the past 20 years these people have been wrong.*

Presentation1

Yeah, sure, but how much lower can they go?  It’s not like interest rates are going to go negative now, are they?

Well, actually, the bond yields for government debt around the world are increasingly going negative, with Quartz reporting that a third of all government debt worldwide has negative rates.  People are paying governments for the privilege of having a nice, safe place to park their money.**

government_bond_yields_rate_chartbuilder

 

Right, right.  Okay.   But I’m not an investor and you aren’t a government.  You don’t expect me to pay you to borrow money from me, now, do you?  I mean, I’m already offering a discounted price and zero-percent financing for 60 months, plus this oven mitt here….

 

*In fairness, the earlier forecasts on this table just predicted interest rates to be rather flat going forward, which, incidentally, is a trick I learned from my time series professor — a pretty good estimate is whatever rates happen to be right now.   If I knew where rates were going, (1) I certainly wouldn’t be telling you; and (2) I’d be enjoying a much different standard of living.

** Here’s “Everything you need to know about negative rates.”

 

 

 

Alumni College Talk

Speaking of Professor Finkler, on Friday he will be giving a talk for the Alumni College.   Here are the particulars:

The Patient Protection and Affordable Care Care (aka Obamacare):
An Efficient and Equitable Path to Life, Liberty, and the Pursuit of Health?

Professor Marty Finkler

Warch Campus Center Cinema
2:10-3:00 p.m.
Friday, June 17

Master of Supply & Demand… and Lots of Other Stuff

In a twist on the “Life After Lawrence” meme, Professor Merton D. “Marty” Finkler officially retired yesterday, after serving on the economics faculty for more than 30 years.  Professor Finkler is the consummate economist, always interested in talking about economics and ideas whether in class or at the ball game.   He also has a remarkable versatility, from his principal field of health economics to his core (and terrifying?) macro theory course to urban economics to sports economics to environmental economics and on to China.  It certainly is not possible to replace his expertise, at least not with one person.  Fortunately, he will continue to teach and engage with our students as an emeritus professor, beginning this fall with his Investments class.

Here he is pictured in his new hood (!), along with our faculty and one of our more photogenic students.   His Honorary Degree citation is below the break.

Last Hurrah

Continue reading Master of Supply & Demand… and Lots of Other Stuff

Masters of Supply & Demand

Congratulations to our 2016 graduates, many of whom walked the stage yesterday.  We were happy to see so many of you and your families at the Saturday reception.   We trust we will hear back from you at some point (and not just because you are applying for graduate school and need a recommendation(!)).

IMG_2401 (Small)

The Economics Department distributes (?) a number of awards each year, and here are the particulars:

The Iden Charles Champion Award in Commerce and Industry (Paper Prize)

  • Mishal Ayz, Astoria, NY, “A Game Theoretic Analysis of International Justice Disputes.”
  • Perrin Tourangeuau, Denver, CO, “Why Forests Fail: Exploring the Relationship between Institutions and Forest Management Outcomes in Haiti and the Dominican Republic.”

The William A. McConagha Prize for excellence in economics (Seniors)

  • Ruby Dickson, Louisville, CO
  • Zachary Martin, Brookfield, WI
  • Perrin Tourangeuau, Denver, CO

The Philip and Rosemary Wiley Bradley Achievement Scholarship in Economics (Juniors)

  • Dylan Geary, Overland Park, KS
  • Mattias Soderqvist, Stockholm, Sweeden

 

Supply & Demand in the News

From *both* of my final exams administered today….

Illustrate each of the following using “comparative static” analysis.   That is, draw a supply and demand graph, show a shift in supply or demand consistent with the headline.

Even with lots of fish, halibut prices high,” Homer News, June 7, 2016

Salmon prices are rising due to the death of millions of fish in Chile,” Daily Mail, June 7, 2016

Lumber Prices Tumble as Demand From China Falls,” 24/7 Wall Street, January 20, 2016

And my personal fave:

Germany had so much renewable energy on Sunday that it had to pay people to use electricity,” Quartz May 10, 2016

Finally, for the environmental students, we give you:

Fish Factor: Permits plummet, halibut prices soar,” Juneau Empire, March 16, 2016

 

The New Economics of Religion

That’s the title of a June 2016 Journal of Economic Literature piece, available at a website near you.   Typically, this wouldn’t warrant a response from the Lawrence Economics Blog, but typically you don’t see accolades like this directed towards one of our own:

One of the classic papers written on the economics of religion, Azzi and Ehrenberg (1975), summarized the literature on what the empirical correlates of religiosity had discovered about the United States until then.

Wow, classic papers!  If you see Professor Azzi, be sure to ask him about the genesis of that paper.

  • Sriya Iyer. 2016. “The New Economics of Religion.” Journal of Economic Literature, 54(2): 395-441.
  • Corry Azzi and Ronald Ehrenberg. 1975. “Household Allocation of Time and Church Attendance.” Journal of Political Economy 83 (1): 27–56.

Economics / Science Hall Colloquium, Monday at 4:30, Wriston Auditorium

Professor Elizabeth J. Wilson from the Humphrey School of Public Policy at the University of Minnesota will be here Monday to talk about the (potential) future of electricity systems.

Professor Wilson is a rather extraordinary interdisciplinary scholar, with a background in environmental science and a Ph.D. in Engineering & Public Policy from Carnegie Mellon University.  She is the recipient of one of the inaugural (2016) Andrew Carnegie Fellowships for her project “Nuclear Futures in a Windy World: A Comparative Analysis Balancing Energy Security, Climate Change, and Economic Development.”  She will spend the 2016-17 academic year in Denmark working on that.

Here is a blurb of her talking about sustainability and interdisciplinary research.

We will see you there.

wilson

 

 

10 Ways to Tell If You Are Sitting Next to an Economist

keynes and friedmanYou may have heard that an economist was taken off an airplane for working on equations that employed Greek letters.  It turned out to be an Italian economist working out a differential equation.  The Buttonwood column of the Economist provides some advice for those who might not know if they are sitting next to an economist (or who the two people pictured above are.)

For starters, here’s one clue.

He keeps telling you that “there is no such thing” as a “complimentary refreshment service.”

For the rest, check out the Buttonwood column.

Enjoy!

Five Big Truths About Trade

In a recent opinion piece in the Wall Street Journal, Princeton economist and former vice-chair of the Federal Reserve, Alan Blinder attempts to add constructive insight to the political discussion regarding international trade.  Below you will find the Five Big Truth he cited.  I encourage you to read the details.

  1. Most job losses are not due to international trade.
  2. Trade is more about efficiency – and hence wages – than about the number of jobs.
  3. Bilateral trade imbalances are inevitable and mostly uninteresting.
  4. Running an overall trade deficit does not make us “losers.”
  5. Trade agreements barely affect a nation’s trade balance.

If you can’t access the Wall Street Journal, use the entry on Greg Mankiw’s blog.