What gun-control headlines mean for gun-industry bottom lines: https://t.co/n2spcLcTce via @specialreports pic.twitter.com/R3QiG4MuSM
— Reuters (@Reuters) February 5, 2016
What #guncontrol headlines mean for gun-industry bottom lines
06 Feb 2016 Leave a comment
in applied price theory, economics of regulation, financial economics, politics - USA
The Inability to Understand Exponential Growth
05 Feb 2016 Leave a comment
in applied price theory, economic growth, macroeconomics Tags: endogenous growth theory, great stagnation
Labour force participation rates of US, UK, Australian and New Zealand workers aged 60 to 64 since 1960
05 Feb 2016 Leave a comment
in applied price theory, economic history, labour economics, labour supply, politics - New Zealand, public economics
Up until the early 1990s, New Zealand had a universal old age pension that was paid from the age of 60. There was no means test or assets test. The eligibility age for this old age pension was increased to age 65 over the course of the 1990s and early 2000s. It obviously showed up in the labour supply of workers aged 60 to 64 in New Zealand both before and after the change in the eligibility age.
Data extracted on 05 Feb 2016 04:49 UTC (GMT) from OECD.Stat.
The tax code if @BernieSanders got everything he wanted
02 Feb 2016 Leave a comment
in applied price theory, politics - USA, public economics Tags: 2016 presidential election, Australia taxation and labour supply, taxation and investment
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Review of #TheBigShort including of the movie
02 Feb 2016 Leave a comment
in applied price theory, business cycles, economic history, entrepreneurship, financial economics, global financial crisis (GFC), great recession, macroeconomics, monetary economics, movies Tags: bank runs, financial crises
About the only time the Hollywood Left oozes with patriotism is when getting stuck into Wall Street. Hollywood must get its revenge for all those times investors did not back their film pitches, trimmed budgets and get the lion’s share of merchandising royalties and syndication profits. As Larry Ribstein explained:
American films have long presented a negative view of business…. it is not business that filmmakers dislike, but rather the control of firms by profit-maximizing capitalists… this dislike stems from filmmakers’ resentment of capitalists’ constraints on their artistic vision.
The Big Short is still a good film despite the left-wing populism, worth going to see. Its limitations in not discussing the monetary policy of The Fed or regulations that encouraged lending to high risk borrowers are justified poetic license and editing.
The film is already 120+ minutes long despite frequent resorts to breaking the fourth wall to explain technical terms, who was what and what they were doing, past and present. The Big Short is a film designed it make money at the box office, not a semester long documentary.
The Big Short is well acted, funny, insightful and still a good story despite the documentary element that was impossible to do without.
The Big Short highlights that its protagonists had skin in the game. They were investing in mortgages or shorting the same in the expectation of a crash. There were no windbags and armchair critics in The Big Short talking gloom and doom on the horizon without investing their own money to profit from their forecasts. That said, the protagonists betting on a sub-prime mortgages crash, bar two of them, were a little bit nutty.
I do not know any of the critics of the economics of the film’s explanation of the sub-prime crisis who suggested how they could fix these gaps in its economics without making the film much, much longer.
These critics fall into the exact same trap that the Big Short was not about. The Big Short was about investors to put their money where their mouth is. The critics of the film should put their script doctoring skills where their mouths are at least of The Big Short.
Source: What ‘The Big Short’ Gets Right, and Wrong, About the Housing Bubble – The New York Times.
Getting stuck into the role of the Fed and regulatory mandates on the banks regarding their level of sub-prime mortgages is for another film. Plenty of people warned of dark days ahead. An essay anyone can read with profit is Ross Levine’s “An Autopsy of the U.S. Financial System: Accident, Suicide, or Negligent Homicide?“
Other films, correctly documentaries, place the blame for the sub-prime crisis and the Great Recession directly on the Fed:
The financial mess we’re still climbing out of can be laid directly at the feet of the Fed, whose misguided advocacy, under Greenspan, of a borrow-and-spend economy rather than a focus on savings and investment has created a situation where, as the title implies, money is disconnected from any underlying value.
There are plenty of points that could be added to the economics of The Big Short if it was a film of more or less unlimited length:
Krugman and friends like the film because it leaves out any discussion of the main culprit behind the financial crisis, which was not Wall Street “greed” but bad monetary and credit policies from the Federal Reserve and the federal government. The movie barely hints at any exogenous factors behind the boom or bust. (This FEE report by Peter Boettke and Steven Horwitz fills in the missing information.) So the pro-regulation crowd is cheering. Viewers are given no understanding of the real causal factors and hence fill in the missing data with a feeling that banks just love ripping people off. To be sure, if you approach this movie with some knowledge of economics and monetary policy, the rest of the narrative makes sense. Of course Wall Street got it wrong, given Washington’s policies on mortgage lending!
To add to the brew, Edward Prescott points out the Great Recession can be explained through productivity shocks. Specifically, a collapse in investment and in particular investment in intangibles such as intellectual property in 2007 in anticipation of more taxes and more regulation.
The Great Recession had many of the same features of the 1990s technology boom but in reverse. The boom in the 1990s and bust in 2007 were somewhat inexplicable because major sources of volatility were unmeasured, specifically, investment in intangible capital.
V.V. Chari also points out that the extent of the financial crisis was overstated. This is because the typical firm can finance its capital expenditures from retained earnings so it was hard to see how financial market disruptions could directly affect investment.
What Chari disputed was that bank lending to non-financial corporations and individuals has declined sharply, that interbank lending is essentially non-existent; and commercial paper issuance by non-financial corporations declined sharply, and rates have risen to unprecedented levels.
John Taylor argues that we should consider macroeconomic performance since the 1960: There was a move toward more discretionary policies in the 1960s and 1970s; A move to more rules-based policies in the 1980s and 1990s; and back again toward discretion in recent years.
These policy swings are correlated with economic performance—unemployment, inflation, economic and financial stability, the frequency and depths of recessions, the length and strength of recoveries. Less predictable, more interventionist, and more fine-tuning type macroeconomic policies have caused, deepened and prolonged the current recession. Robert Hetzel puts it this way:
The alternative explanation offered here for the intensification of the recession emphasizes propagation of the original real shocks through contractionary monetary policy. The intensification of the recession followed the pattern of recessions in the stop-go period of the late 1960s and 1970s, in which the Fed introduced cyclical inertia in the funds relative to changes in economic activity.
Finn Kydland considers fiscal policy to be at the heart of the slow recovery. Instead of restructuring and investing more prudently, Western countries faced with budget shortfalls will seek to increase taxes:
- The U.S. economy isn’t recovering from the Great Recession of 2008-2009 with the anticipated strength.
- A widespread conjecture is that this weakness can be traced to perceptions of an imminent switch to a regime of higher taxes.
- The fiscal sentiment hypothesis can account for a significant fraction of the decline in investment and labor supply in the aftermath of the Great Recession, relative to their pre-recession trends.
- The perceived higher taxes must fall almost exclusively on capital income. People must suspect that the tax structure that will be implemented to address large fiscal imbalances will be far from optimal.
Now imagine trying to incorporate all the above points into a film and keeping it at its current two-hour length?
@BernieSanders proud of @AndrewLittleMP @grantrobertson1 @bryce_edwards
31 Jan 2016 1 Comment
in applied price theory, economics of education, income redistribution, politics - New Zealand, public economics, rentseeking
Unions are not the cause of our 40 hour workweek
31 Jan 2016 Leave a comment
in applied price theory, applied welfare economics, economic history, labour economics, labour supply, unions Tags: 40 hour week, hours worked, living standards, union power, union wage premium, working hours, working week
The 1st @NYTimeskrugman on #TPPANoWay @Oxfamnz #JaneKelsey
30 Jan 2016 Leave a comment
in applied price theory, applied welfare economics, development economics, economic history, growth disasters, growth miracles, international economics Tags: customs unions, free trade agreements, globalisation, Jane Kelsey, Leftover Left, Oxfam, Paul Krugman, preferential trading agreements, rational irrationality, TPP, Twitter left, Yes Minister
https://twitter.com/TPPMediaMarch/status/692055631579185152
If George Bush had not won the 2000 presidential election, Paul Krugman would have taken over as the best communicator of economics since Milton Friedman. Instead, he became patient number no.1 of George Bush derangement syndrome. Ann Coulter was patient no. 1 of Clintons derangement syndrome.
Source: Enemies of the WTO.
How does @BernieSanders’s #tax plan compare to the rest?
30 Jan 2016 Leave a comment
in applied price theory, politics - USA, public economics
Development & Trade: Empirical Evidence @DavidShearerMP @oxfamnz @TPPANoWay
29 Jan 2016 Leave a comment
in applied price theory, applied welfare economics, development economics, economic history, growth disasters, growth miracles, international economics, politics - New Zealand, politics - USA Tags: free trade, free trade agreements, preferential trading agreements, The Great Enrichment, The Great Fact, TPPA, WTO
@BillEnglishMP @NZTreasury too busy to report on SOE portfolio returns
28 Jan 2016 Leave a comment
in applied price theory, economics of bureaucracy, financial economics, industrial organisation, politics - New Zealand, public economics
Today the Treasury advised that it no longer calculates an annual rate of return on the portfolio of state owned enterprises as a whole. It no longer publishes an annual portfolio report (APR).
Source: Treasury response to Official Information Act request by Jim Rose, 14 January 2016.
The Treasury regards the crown portfolio report which contains performance indicators on the state owned enterprises portfolio as a whole as too resource intensive.
The Treasury prefers to be more forward-looking in their reporting on a quarterly basis to the Minister of Finance. Unfortunately, the Treasury refused to my requests for access to this forward-looking reporting to the Minister of Finance on commercial-in-confidence grounds.
The forward-looking approach to state-owned enterprise performance is now only by the Treasury and the Minister of Finance. No one else has access to this financial performance information.
It is no longer possible to say using a figure calculated by the Treasury whether the portfolio of state owned enterprises as a whole are a good return to the taxpayer or not. Individual annual reports of the state owned enterprises can be reviewed but the portfolio wide rate of return is no longer available from the Treasury with the associated credibility of the same.
A common argument against state ownership is that as a whole government ownership is a bad investment. Specifically, the portfolio of state owned enterprises struggle to pay a return in excess of the long-term bond rate.
A common argument for continued state ownership is the loss of the dividends from privatisation. The vulgar argument such as by the New Zealand Labor Party and New Zealand Greens is if a state owned enterprise is privatised either partially or fully, the taxpayers no longer receive dividends. The fact that the sale price reflects the present value of future dividends is simply ignored.
Source: Treasury, Crown Portfolio Report 2013.
The sophisticated argument is the assets are under-priced such as for political reasons. Failed privatisations are indeed the best case against state ownership because governments cannot even sell an asset with such any degree of competence.
Governments are so bad as business owners and so incapable of running a commercial process free of politics that governments cannot even sell a state-owned enterprise for a good price under the full glare of the media and public.
Source: Treasury, Crown Portfolio Report 2013.
A reply to the loss of dividends argument is the dividends from the portfolio as a whole do not repay the government debt incurred to fund capital infusions into state-owned enterprises both when initially established and through time. In that case, it is better to leave your money in the bank than in the state of enterprise.
John Quiggin often criticises privatisation on the grounds that state owned enterprises can invest at a cheaper rate because they are financed at the long-term bond rate:
In general, even after allowing for default risk, governments can borrow more cheaply than private firms. This cost saving may or may not outweigh the operational efficiency gains usually associated with private ownership.
It is not possible to scrutinise that argument without an annual rate of return on the portfolio of state owned enterprises as a whole to see if it is true at first pass at least. As the Treasury no longer calculates a rate of return on the portfolio and taxpayers’ equity, that debate comes to something of a crashing halt in New Zealand.
If these state owned enterprises were privately owned and listed on the share market, investors would just look at trends in share prices for daily measure of expected future profitability.
John Quiggin made the best simple summary of the case for privatisation which was the selling the dogs in the portfolio:
The fiscal case for privatisation must be assessed on a case by case basis. It will always be true for example that if a public enterprise is operating at a loss, and can be sold off for a positive price with no strings attached, the government’s fiscal position will benefit from privatisation.
Various early ventures in public ownership, such as the state butcher shops operated in Queensland in the 1920s (apparently a response to concerns about thumbs on scales) met this criterion, and there doesn’t seem to be much interest in repeating this experiment.
Quiggin also made a measured statement of why state ownership should be limited at most to monopolies:
In most sectors of the economy, the higher cost of equity capital is more than offset by the fact that private firms are run more efficiently, and therefore more profitably, than government enterprises.
But enterprises owned by governments are usually capital intensive and often have monopoly power that entails close external regulation, regardless of ownership. In these situations, the scope to increase profitability is limited, and the lower value of the asset to a private owner is reflected in the higher rate of return demanded by equity investors.
Quiggin is wrong about government enterprises have been a lower cost of capital because it contradicts the most fundamental principles of business finance as explained by Sinclair Davidson:
…it is clear that the Grant-Quiggin view violates the Modigliani-Miller theories of corporate finance. The cost of capital is a function of the riskiness of the investment projects and not a function of a firm’s ownership structure.
How the cash flows of a business are divided between owners and creditors does not matter unless that division changes the incentives they have to monitor the performance of the firm and keep it on its toes. Those lower down the pecking order if things go wrong such as owners have much more of an incentive to monitor the success of the business and lift its performance.
Capital structures of firms, the property rights structures of firms, matter precisely because they influence incentives of those with different claims on the cash flows of the firm.
Having to pay debt disciplines managerial slack and ensures that free-cash flows are used to repay debt (or pay dividends) rather than be invested in low quality new ventures. Having to borrow from strangers such as banks ensures regular scrutiny of the soundness and prospects of the company from a fresh set of eyes. Capital structures made up of both debt and equity keeps the firm on its toes.
Unfortunately, in New Zealand it is much more difficult to review the arguments for and against the current size and shape of the state owned enterprise portfolio as for example summarised by John Quiggin:
Technologies and social priorities change over time, with the result that activities suitable for public ownership at one time may be candidates for privatization in another. However, the reverse is equally true. Problems in financial markets or the emergence of new technologies may call for government intervention in activities previously undertaken by private enterprise.
In summary, privatization is valid and important as a policy tool for managing public sector assets effectively, but must be matched by a willingness to undertake new public investment where it is necessary.
As a policy program, the idea of large-scale privatization has had some important successes, but has reached its limits in many cases. Selling income-generating assets is rarely helpful as a way of reducing net debt. The central focus should always be on achieving the right balance between the public and private sectors.
This balancing of public and private ownership is more difficult in New Zealand because portfolio wide rates of return are unavailable unless you calculate them yourself. That must be labour-intensive given the Treasury thought it was too labour-intensive for it to do for itself.
An obvious motive to start a review the extent of state ownership is the portfolio is performing poorly. That warning sign is no longer available because the crown portfolio report is no longer published.
One way to fix an underperforming portfolio is to sell the dogs in the portfolio. One of the first ways owners notice dogs in their portfolio is the portfolio not returning as well as it used too because of the emergence of these dogs so further enquiries are made and explanations sought.
Taxpayers, ministers and parliamentarians are all busy people with little personal stake in the rate of return on the state owned enterprises portfolio.
Taxpayers, ministers and parliamentarians will all first look at the portfolio wide rate of return to see whether more detailed scrutiny of individual investments is required. That quick check against poor value for money and trouble ahead is no longer available on the state owned enterprises portfolio in New Zealand.
@garethmorgannz @geoffsimmonz the labour supply effects of UBI – updated
26 Jan 2016 Leave a comment
in applied price theory, labour supply, law and economics, politics - New Zealand, poverty and inequality, public economics
One of the many drawbacks of the universal basic income is it will induce the recipients to cut back on their labour supply. There are studies of this labour supply effect through the study of what happens when people win the lottery – either the big one or a small prize.
Winning the lottery is the equivalent of winning an annuity equal to whatever annual income you can get it current low interest rates and share market returns.
A surprisingly number of people on the Left who deny that taxes have significant labour supply effects will nonetheless accept that winning the lottery will induce people to quit work permanently or cut back at least. The most likely reason is they buy lottery tickets too.
A study has just come out on the labour supply effects of winning the Swedish lottery. The sample in this study was really big: several million Swedish lottery winners.
Sweden seems to be like the USA in that both are awash with interesting economic data to the many other countries do not collect. Moreover, they were able to study these Swedish lottery winners over a 5 to 10-year period. Labour supply detail at that level is like going to heaven for an empirical labour economists.
Source: Labour supply responses of lottery winners | VOX, CEPR’s Policy Portal.
The researchers found that in common with a previous study of the labour supply of lottery winners after their win that there were
modest reductions in labour earnings suggesting every dollar of universal basic income would reduce labour earnings by roughly $0.11.
The new research also found productivity losses of $1.40 for every hundred dollars of lottery winnings and that the partners of the lottery winners cut back on their labour suppliers well. No surprise there. Taking all these labour supply effects into account, our researchers concluded that:
every dollar won in a lottery reduces lifetime after-tax labour earnings of winners by $0.10-$0.20.
All in all, the universal basic income will be a negative productivity shock built on a negative productivity shock. First of all, there is the great big new tax to fund the universal basic income. Then the recipients of the basic income will cut back on their labour supply further compounding the massive social costs of the universal basic income.
A universal basic income is a bad idea from start to finish and that is before you consider the many advantages of encouraging people to work for their living. Working for your living is a central expectation of adult life.
UPDATE: what is the magnitude of this labour supply drop from universal basic income? The usual labour supply effect of a recession as recently summarised by Richard Rogerson is as follows:
Consider by way of comparison the labour market fluctuations associated with the business cycle. Going from normal times to a fairly severe recession is usually associated with a drop in total hours worked of about 3 percent.
A universal basic income will push the New Zealand economy into recession off the back of labour supply effect from the windfall increase in incomes alone. That is before you consider the massive productivity shock pushing the economy down further through a massive increase in the taxation of capital, which is the most inefficient form of taxation.
@realdonaldtrump is wrong in tariffs
26 Jan 2016 Leave a comment
in applied price theory, applied welfare economics, economic history, international economics, politics - USA Tags: 2016 presidential election, China, tariffs, trade wars
There is plenty of evidence of downward nominal wage flexibility
24 Jan 2016 1 Comment
in applied price theory, business cycles, macroeconomics, unemployment
Elsby, Shin and Solon (2016) have published a paper throwing a spanner in the works for business cycle theories premised on downward wage rigidity:
We devote particular attention to the hypothesis that downward nominal wage rigidity plays an important role in cyclical employment and unemployment fluctuations. We conclude that downward wage rigidity may be less binding and have lesser allocative consequences than is often supposed.
Keynesian macroeconomics is premised on downward wage rigidity. There is mass unemployment during recessions because employers are unwilling or unable to cut wages.
Elsby, Shin and Solon (2016) found that a non-trivial fraction of workers report nominal wage reductions: at least 10% of hourly workers and 20% of non-hourly workers. This fraction of workers whose nominal wage has been cut has been increasing since 1980 as shown in the chart below. The remaining workers either experienced a nominal wage freeze or a nominal wage increase in that year.
“What can wages and employment tell us about the UK’s productivity puzzle?” by Richard Blundell, Claire Crawford and Wenchao Jin found that in the recent British recession, 12% of employees in the same job as 12 months ago experienced wage freezes and 21% of workers in the same job as 12 months ago experienced wage cuts.
These results from the USA and UK come as no surprise to me because I have been on a collective employment agreement where after a restructuring, my pay was cut. The alternative was to leave and not receive a redundancy payment.
Chris Pissarides(2009), The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?, Econometrica argued the wage stickiness is not the answer to explaining unemployment since wages in new job matches are highly flexible:
1. wages of job changers are always substantially more procyclical than the wages of job stayers.
2. the wages of job stayers, and even of those who remain in the same job with the same employer are still mildly procyclical.
3. there is more procyclicality in the wages of stayers in Europe than in the United States.
4. The procyclicality of job stayers’ wages is sometimes due to bonuses, and overtime pay but it still reflects a rise in the hourly cost of labor
to the firm in cyclical peaks
I have been on several individual and collective agreements that grandfathered pay and conditions for existing workers and paid recruits less. I have lost count of the number of retirement pension scheme closed to new employees since I first encountered this cost saving practice at my first lecture at University.
My commercial law lecturer was explaining that he was lecturing part-time. His main job dealing with the litigation that might arise out of closing of the University retirement pension scheme. Some top-class academics had to retire earlier than they planned because of this closure to avoid a reduction in their pensions.
Most of my friends in the private sector are on bonus schemes were the great majority of the bonus is based on company profitability. Indeed, I know one company where everyone from the CEO down loses their bonus if there is a fatal workplace accident.
How can downward wage rigidity be a scientific hypothesis if the extensive international evidence of widespread nominal wage cuts wage cuts since the 1980s and 40%+ of the workforce on performance bonuses is not enough to refute it?
The same edition of the Journal of Labour Economics had a paper by Edward Lazear about how workplace effort varies with the business cycle and employment conditions:
…it seems that employers push their employees harder during recessions as they cut back the work force and ask each of the remaining workers to cover the tasks previously performed by the now-laid-off workers.
A number of models of long-term contracting in the labour market suggest that the level of employee effort expected varies with peak loads and general labour market conditions. That is understood from the start and is not is regarded as some form of opportunism by the employer after the contract is signed.
Likewise, employers do not lay off workers as soon as they become unprofitable in a downturn. If they did so, they would write off valuable firm specific human capital that might become profitable soon once the market recovers.
It is much easier to explain mass unemployment during a recessionas a a burst of layoffs at the beginning of the recession followed by the time it takes the unemployed to find suitable new vacancies and for employers to find it profitable to create such vacancies.
Some of these unemployed will simply wait for conditions to improve their existing industrial occupation so as to preserve their specialised human capital. These unemployed can be characterised as waiting unemployment or rest unemployment.
Other jobseekers will search further afield in new industries and occupations. These unemployed either have human capital that more general and mobile across many industries or have decided to scrap their industry specific and occupation specific human capital and try something else. The downturn in their current industry or occupation may be of sufficient duration that they regard waiting is a poor investment.
The economic concept of unemployment was rather primitive until Hutt write his hard to read theory of idle resources in 1939, Stigler’s paper in 1962 and the Phelps book in 1970.
I found Lucas and Prescott’s islands model to be an excellent explanation of unemployment. Lucas and Prescott’s economy is composed of a large number of scattered islands. Each of these islands is a one local labour market.
Workers in each of these islands have no precise knowledge of what wages will prevail in the economy outside of their own local labour market. Workers either remain on their island or leave it for what they expect to be a more alluring job further afield. Some workers are unemployed crossing between the islands, but they are nevertheless engaging in optimizing behaviour because they are looking for a better job than they have now.
Alchian (1969) lists three ways to adjust to unanticipated demand fluctuations:
• output adjustments;
• wage and price adjustments; and
• Inventories and queues (including reservations).
Alchian (1969) suggests that there is no reason for wage and price changes to be used regardless of the relative cost of these other options:
• The cost of output adjustment stems from the fact that marginal costs rise with output;
• The cost of price adjustment arises because uncertain prices and wages induce costly search by buyers and sellers seeking the best offer; and
• The third method of adjustment has holding and queuing costs.
There is a tendency for unpredicted price and wage changes to induce costly additional search. Long-term contracts including implicit contracts arise to share risks and curb opportunism over sunken investments in relationship-specific capital. These factors lead to queues, unemployment, spare capacity, layoffs, shortages, inventories and non-price rationing in conjunction with wage stability.
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