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Wednesday assorted links

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The post Wednesday assorted links appeared first on Marginal REVOLUTION.

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ahofer
3 hours ago
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I see what you did there (re Arrow)
Princeton, NJ or NYC
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ANN ALTHOUSE: Trump haters: Please do these 2 thought experiments….

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ANN ALTHOUSE: Trump haters: Please do these 2 thought experiments.

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ahofer
11 hours ago
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I don't know if I'm a hater or not, but I would take the first version (with MY preferred policies, of course), but worry about diplomacy under such a lout.
Princeton, NJ or NYC
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A Critical Point of Differentiation in Framing

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There are a couple of quotes that I want to pull from articles that I read this morning.  The first is from WSJ editorial writer Bret Stephens.  Stephens is writing about the collapse of Western Civ in education; and how Trump has leveraged this.  Stephens is no fan of Trump, but he is certainly a conservative or more appropriately a classical liberal which amounts to being a conservative these days.

Western Civilization (my add in italics) understood that its moral foundations had been laid in Jerusalem; its philosophical ones in Athens; its legal ones in Rome. It treated with reverence concepts of reason and revelation, freedom and responsibility, whose contradictions it learned to harmonize and harness over time. It believed in the excellence of its music and literature, and in the superiority of its political ideals. It was not ashamed of its prosperity. If it was arrogant and sinful, as all civilizations are, it also had a tradition of remorse and doubt to temper its edges and broaden its horizons. It cultivated the virtue of skepticism while avoiding the temptation of cynicism.

Personally, I am very interested in what happens to the Department of Labor ruling on retirement savings.  It strikes me as weird that the Department of Labor would stick it’s nose into finance.  It also strikes me as weird that we have to have a 1000 page edict to make sure people treat other people ethically.  The folks at Riskalyze have blogged extensively about the DOL law.  Trump has indicated that his administration would look at it.  Today in the WSJ, liberal Jason Furman passionately defends it.  Here is a quote that I want you to ponder:

Because the tax code subsidizes retirement savings, the government has an important role to play in ensuring their safety and security.

The individual, and corporate tax code in the US is totally screwed up.  It creates all kinds of economic incentives that are not optimal for efficiency.  We need to fix it with an eye on efficient economic outcomes, not lobbied outcomes.

Putting these two quotes together sums up the current divide in America quite nicely.  Do we start the framing of things from the basis of what government allows us to do-or what we allow government to do to us in order to run a civil society?  The way I read the Declaration and Constitution it’s the latter.

Is it my work that earned the money?  Or is it the government’s money since they print the currency and write the laws/regulations?

Why does the government have to have a special tax code for retirement?  What if the tax code was a flat, straight consumption tax?  Would the DOL law go away?  Should we let private companies innovate in the way they set fees and allow people to be free to choose?

The other point is if you don’t believe the first one, it’s pretty hard to think critically about the second.

 

 

 

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ahofer
11 hours ago
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Yes, that's weird reasoning.
Princeton, NJ or NYC
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Trade and The World's Most Misunderstood Accounting Identity: Y=C+I+G+X-M (Update)

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(Note:  This is an update of this post based on a new set of economically illiterate people in the White House).

Repeat after me:  Y=C+I+G+X-M is an accounting rule.  It does not explain anything about the economy.  It is as useful to telling us anything interesting about the economy as the equation biomass=plants+animals+bacteria tells us anything about the ecosystem.

Apparently our new commerce secretary is totally ignorant of this fact:

[New Commerce Secretary Wilbur Ross] has a simple but misguided view of global trade. He believes that good trade policy yields a national trade surplus, while bad deals produce trade deficits—as if every country in the world could run a trade surplus. In an August letter to this newspaper, Mr. Ross wrote, “It’s Econ 101 that GDP equals the sum of domestic economic activity plus ‘net exports,’ i.e., exports minus imports. Therefore, when we run massive and chronic trade deficits, it weakens our economy.”

Who taught him that? Imports are subtracted in GDP calculations to avoid overstating domestic production, not because they make us poorer. Many domestic products wouldn’t exist without foreign components.

Here is his faulty logic.  The GDP (Y) is calculated by adding Consumer spending + Investment by Business + Government spending + eXports and then subtracting iMports.  Because imports are subtracted in the GDP equation, they look to the layman like they shrink the economy.  How do we grow the economy?  Why, let's reduce that number that is subtracted!  But this is wrong.  Totally wrong.   Anything that reduces imports (e.g. a tariff) will likely reduce C+I+G by the same amount.   The M term is there simply to avoid double counting.  It has no economic meaning in this context whatsoever.  I have tried many times to explain this, but let me see if I can work by analogy.

Let's say we wanted an equation to count the amount of clothing we owned.  To make things simple, let's say we are only concerned with the total of Shirts, Pants, and Underwear.   Most of our clothes are in the closet, so we say our clothes are equal to the S+P+U we count in our closet.  But wait, we may have Loaned clothes to other people.  Those are not in our closet but should count in our total of our owned clothing.  So now clothes = S+P+U+L.  But we may also have Borrowed clothes.  Some of those clothes we counted in the closet may be Borrowed and thus not actually ours, so we need to back these out.  Our final equation is clothes owned = S+P+U+L-B.  Look familiar?

Let's go further.  Let's say that we want to increase our number of clothes owned.  We want wardrobe growth!  Well, it looks like those borrowed clothes are a "drag" on our wardrobe size.  If we get rid of the borrowed clothes, that negative B term will get smaller and our wardrobe has to get larger, right?

Wrong.  Remember, like the GDP equation, our wardrobe size equation is just an accounting identity.  The negative B term was put in to account for the fact that some of the clothes we counted in S+P+U in the closet were not actually ours.  If we decrease B, say by returning our friend's shirt, the S term will go down by the exact same amount.  Sure, B goes down, but so do the number of shirts we count in the closet.  So focusing on the B term gets us nowhere.

But it is actually worse than that, because focusing on reducing B makes us worse off.  If negative term B rises, our wardrobe is no larger, but we get the use of all of those other pieces of clothing.  Our owned wardrobe may not be any larger but we get access to more choices and clothing possibilities.  When we drive the negative term B down to zero, our wardrobe is no larger and we are worse off with fewer choices.  Similarly, in the the economy, focusing on reducing imports does not grow the economy, it just serves to make us poorer by reducing our buying choices and increasing the cost of consumer goods as well as manufacturing inputs.

I don't want to say that it's impossible for increases in imports to drag the economy.  For example, if oil prices rise, the imports number measured in dollars will likely rise, and the economy could be worse off as we have to give up buying other things to continue to buy the oil we need.  But, absent major price changes, drops in exports more likely just mirror drops in C+I+G.  If consumers are hurting, they spend less on everything, including imported goods.   At the end of the day, none of these numbers (Mr. Keynes, are you listening?) are independent variables.

Postscript:  Here is another example.  Imagine a company with three divisions, D1, D2, and D3.  How do we compute the company's total revenue?  Well, typically we would add the revenue from the three divisions, so Total Corporate Revenue R = RD1 + RD2 + RD3.  Oh, but there is a problem.  Some of the sales from each of our divisions are to each other.  We only want to measure our true revenue from external sales, so we need to subtract intra-company sales from the total (this is a very typical step in conglomerate accounting).  So total company revenue R = RD1+RD2+RD3-IC, where IC are the total of intra-company sales within the company between divisions.  If you had a new CEO who looked at this accounting, and the CEO's first thought was "if we got rid of all these intra-company sales, surely we would have more revenue, because they are subtracting from total revenue in the revenue equation."  What would you do with this CEO?  If you knew the first thing about corporate accounting, you would fire him or her immediately for being a moron.  Just because the IC term is negative in the accounting equation does not mean that intra-company sales are a drag on revenues.  Eliminating intra-comapny sales would likely reduce revenues and profits as company insiders are forced to find new, less trusted, and more expensive sources for their purchases than buying internally.

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ahofer
1 day ago
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This has been a surprisingly difficult thing to communicate. Good try here.
Princeton, NJ or NYC
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PredictIt

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PredictIt runs a pile of markets on the American Presidency, among other things. Here are some good ones for America-watchers:
The full set of US Politics predictions is here. PredictIt is the US-facing prediction market built by the iPredict team at Victoria University, here in Wellington, to serve American traders. Kiwis cannot trade there. We would have been able to trade on it at iPredict, but we no longer have iPredict.
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ahofer
5 days ago
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wow. At the same odds, I'd take long Trump impeach (not removed) vs. short hillary prosecuted.
Princeton, NJ or NYC
gazuga
4 days ago
Agreed about the relative likelihood of those two events, but at 21% I'd be hammering the under on both.
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We are the 100%.

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Eons ago, I told commenter TravisV that I intended to look at this paper, and I finally have.  The abstract is:
Three mutually uncorrelated economic disturbances that we measure empirically explain 85% of the quarterly variation in real stock market wealth since 1952. A model is employed to interpret these disturbances in terms of three latent primitive shocks. In the short run, shocks that affect the willingness to bear risk independently of macroeconomic fundamentals explain most of the variation in the market. In the long run, the market is profoundly affected by shocks that reallocate the rewards of a given level of production between workers and shareholders. Productivity shocks play a small role in historical stock market fluctuations at all horizons.
This would appear on the surface to push against the notion that we are the 100%.  Over the long term, fluctuations in stock market value come from reallocation between workers and shareholders.

The actual findings of this paper are interesting and useful, but I think we need to be careful about how they are interpreted.  Much like the Mian & Sufi findings about the housing boom, mostly what is going on here is that they have adjusted away almost the entire story, and they are analyzing the small sliver that is left.  They have detrended the data exponentially.  For instance, take a look at this graph from the voxeu article:

Over the long term, we can see here that fluctuations from the trend largely correlate with changes in the share of income to shareholders.

From the article's conclusion:

Technological progress that raises aggregate consumption and benefits both workers and shareholders plays a small role in historical stock market fluctuations at all horizons...
Indeed, without these shocks, today's stock market would be about 10% lower than it was in 1980. The shocks responsible for big historical movements in stock market wealth are not those that raise or lower aggregate rewards, but are instead ones that redistribute a given level of rewards between workers and shareholders.
This seems like misleading interpretation to me.  We are talking about a 10% fluctuation over a period where the trend growth was something like 700% in real terms.

Here is a scatterplot of real capital income and real compensation since WW II.  If you want to know what capital income will be in a given year, an extremely good proxy would be knowing the level of compensation in that year - and vice versa.  The correlation is .97.

So, whatever we might learn from this paper - and there are things to learn from it - it seems very important to keep in mind that this paper is about a 3% portion of the total story.

It seems to me that the quote above should be prefaced with the sentence: Technological progress that raises aggregate consumption and benefits both workers and shareholders explains general growth in stock market values, which is about 97% of the growth in income and wealth.  Shifting factor shares might explain much of the other 3%.

It's a shame that the human psyche is so drawn to battles over relative status.  The story of human history and human advancement is a story of the battle to overcome this mental defect.  We are the 100%.  How much social attention is paid to the 97% of the story versus the 3%?

The largest risk of economic dislocations, like what we have seen over the past couple of decades, isn't the actual shocks themselves.  It is the human tendency to retreat into battles over relative status.  Notice that their measure of the effect of factor shares on stock wealth has declined since the late 1990s.  How's that workin' for ya?  Is there any disagreement that 1968 and 1998 were better for both shareholders and workers than 1978 or 2008?
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ahofer
5 days ago
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"It's a shame that the human psyche is so drawn to battles over relative status. The story of human history and human advancement is a story of the battle to overcome this mental defect. We are the 100%. How much social attention is paid to the 97% of the story versus the 3%?"
Princeton, NJ or NYC
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