Dollars and Jens
Sunday, July 31, 2005
The third comment here caught my attention. Frankly, most of the popular fallacies about economics that I see could be helped by assuming the traditional (Walrasian) supply/demand model assuming a perfectly-functioning market. But I'm also reminded of an incident from a few years back.
A friend of mine mentioned that she thought economists were unrealistic. I felt a bit defensive and more than a bit confused, so I asked her to elaborate. It came down to the fact that she had taken one class in economics, and it had focused on the behavior of perfectly competitive markets. She apparently assumed that was all there was to the field. The perfect competition model is undoubtedly the right model to start with, just as it's right to start a new student of physics with perfect billiard balls on frictionless surfaces. But I don't think anyone assumes, after their one physics class, that physicists believe in frictionless surfaces, and I never really figured out why she had assumed that economists believe in frictionless markets.
Coincidentally, today is Milton Friedman's 93rd birthday.
Monday, July 25, 2005
From the Washington Post:
In Medicare's upside-down reimbursement system, hospitals and doctors who order unnecessary tests, provide poor care or even injure patients often receive higher payments than those who provide efficient, high-quality medicine.Quantity of care is easier to measure than quality. There are some attempts underway to improve the system, but don't expect a lot of improvement over night.
Saturday, July 23, 2005
Federal funds rate
You know, this action by China Thursday is going to require the fed to keep raising rates; futures are suggesting 4% at the end of the year, and I'm inclined to think we're going to get there sooner.
Wednesday, July 20, 2005
A pension fund on Tuesday sued Morgan Stanley directors, alleging they tolerated "grotesque mismanagement" by former Chief Executive Philip Purcell and former co-President Stephen Crawford before the men reaped excessive exit payments.Chicago Tribune (requires registration).
I'm not sure I've heard explicitly, and this story sure doesn't give details, but I'm left with the impression that much of the relief being sought is injunctive, and that the fund may not in fact be seeking any monetary payment. If so, this is to be held up as the kind of shareholder lawsuit that should go forward, and the people responsible granted titles of nobility, the U.S. Constitution notwithstanding. If management oversteps its bounds, shareholders should absolutely be given any reasonable chance to effect a correction, and, where appropriate, to sanction the individuals responsible. They should not punish the shareholders who remain.
Testimony of Chairman Alan Greenspan
I'm going to excerpt a lot of Greenspan's prepared testimony to the House Financial Services committee from this morning.
The evolution of unit labor costs will also reflect the growth of output per hour. Over the past decade, the U.S. economy has benefited from a remarkable acceleration of productivity: Strong gains in efficiency have buoyed real incomes and restrained inflation. But experience suggests that such rapid advances are unlikely to be maintained in an economy that has reached the cutting edge of technology. Over the past two years, growth in output per hour seems to have moved off the peak that it reached in 2003. However, the cause, extent, and duration of that slowdown are not yet clear. The traditional measure of the growth in output per hour, which is based on output as measured from the product side of the national accounts, has slowed sharply in recent quarters. But a conceptually equivalent measure that uses output measured from the income side has slowed far less. Given the divergence between these two readings, a reasonably accurate determination of the extent of the recent slowing in productivity growth and its parsing into cyclical and secular influences will require the accumulation of more evidence.I know less about this than I'd like to, but it calls attention to the distinction between economics (or any science) in theory and in practice; measurements are never as clean as theories, and certainly not in real-time.
More heavily covered in synopses has been the following:
Two distinct but overlapping developments appear to be at work: a longer-term trend decline in bond yields and an acceleration of that trend of late. Both developments are particularly evident in the interest rate applying to the one-year period ending ten years from today that can be inferred from the U.S. Treasury yield curve. In 1994, that so-called forward rate exceeded 8 percent. By mid-2004, it had declined to about 6-1/2 percent--an easing of about 15 basis points per year on average. Over the past year, that drop steepened, and the forward rate fell 130 basis points to less than 5 percent.In summary: long-term interest rates have dropped substantially in the past decade as nations with high savings rates have grown faster than those with low ones, raising the global savings rate, while actual capital investment has failed to keep up. This is an interesting explanation for what we observe, and I'm going to think about its long-term implications, and may even say more about them here later.
Some, but not all, of the decade-long trend decline in that forward yield can be ascribed to expectations of lower inflation, a reduced risk premium resulting from less inflation volatility, and a smaller real term premium that seems due to a moderation of the business cycle over the past few decades. This decline in inflation expectations and risk premiums is a signal development. As I noted in my testimony before this Committee in February, the effective productive capacity of the global economy has substantially increased, in part because of the breakup of the Soviet Union and the integration of China and India into the global marketplace. And this increase in capacity, in turn, has doubtless contributed to expectations of lower inflation and lower inflation-risk premiums.
In addition to these factors, the trend reduction worldwide in long-term yields surely reflects an excess of intended saving over intended investment. This configuration is equivalent to an excess of the supply of funds relative to the demand for investment. What is unclear is whether the excess is due to a glut of saving or a shortfall of investment. Because intended capital investment is to some extent driven by forces independent of those governing intended saving, the gap between intended saving and investment can be quite wide and variable. It is real interest rates that bring actual capital investment worldwide and its means of financing, global saving, into equality. We can directly observe only the actual flows, not the saving and investment tendencies. Nonetheless, as best we can judge, both high levels of intended saving and low levels of intended investment have combined to lower real long-term interest rates over the past decade.
Since the mid-1990s, a significant increase in the share of world gross domestic product (GDP) produced by economies with persistently above-average saving--prominently the emerging economies of Asia--has put upward pressure on world saving. These pressures have been supplemented by shifts in income toward the oil-exporting countries, which more recently have built surpluses because of steep increases in oil prices. The changes in shares of world GDP, however, have had little effect on actual world capital investment as a percentage of GDP. The fact that investment as a percentage of GDP apparently changed little when real interest rates were falling, even adjusting for the shift in the shares of world GDP, suggests that, on average, countries' investment propensities had been declining.
Thursday, July 14, 2005
Stocks are again up on news that companies aren't able to pass cost increases on to consumers.
Wednesday, July 13, 2005
The New York Times (free reg. req.) reports that the hedge funds' glory days are over:
According to the survey, more than 60 percent of hedge fund investors say the huge flow of money into hedge funds will result in lower returns; of those investors who have more than 10 years of experience investing in hedge funds, 70 percent say returns will decline.Smarter than historically typical; cf. canals.
Monday, July 11, 2005
A thought I've been throwing around for a couple months: a simple homoskedastic brownian process isn't white noise; it's pink noise — low frequencies predominate over high frequencies. It's not a perfect model for the stock market, then, but it does correctly predict the existence of Elliott Wave Theorists.
I suppose I should mention that I find Elliott Wave Theory inherently funny. Phrenology, too.
Saturday, July 09, 2005
again with the airlines
Government is preserving precisely what ails the industry — excess capacity. Suppose a major carrier were to go out of business. A salient fact about the airline industry is, Kelleher says, that "its principal capital asset travels at over 500 miles per hour." Which means: If one airline fails, unserved markets will be served swiftly. He notes that on the afternoon of May 12, 1982, Dallas-based Braniff Airlines — one of those that had urged government to strangle Southwest in its cradle — went out of business. The next morning at least five airlines started up on some Braniff routes.George Will. I don't feel like repeating my rant.
It is well-known in my line of work that forward exchange rates, going out in time, change at a rate equal to the difference between the interest rates in the two currencies — if I lend out $100 for a year, borrow the equivalent amount of pounds, and sell forward the dollars in exchange for pounds at the end of the year, the net result had better be pretty close to a wash, or arbitrageurs would make it become one.
When asking what causes exchange rates, the most straightforward answer is that a certain amount of money ought to buy the same amount of stuff in each country — "Purchasing Power Parity". Anyone who's traveled knows this isn't exactly true, and in some cases, not even approximately — developed countries have much higher prices than undeveloped countries, debtor nations and manufacturing nations tend to have higher prices than others, etc. — but it's generally approximately true that the "real exchange rate" — the ratio of price levels in one country to those in another — holds pretty much constant between developed countries, and tends toward one. This suggests that real interest rates should be the same in all currencies; if I sell a given consumer basket of goods and invest the proceeds, those proceeds should be able to buy the same amount without regard to the currency for which the basket was sold and in which the investment was made.
Friday, July 08, 2005
New numbers from BLS today. The household survey has better numbers than the establishment survey. Again. (Actually, the difference is pretty small this time, but the trend continues.)
Saturday, July 02, 2005
I've been reading an interesting paper on "Folk Economics" — i.e., how untrained people think about economics (with some proposed reasons). To sum up, noneconomists underrate the importance of incentives and tend to view the world in zero-sum terms, paying more attention to wealth/income distribution and little or no attention to growth.
The article makes several references to The Blank Slate, which will probably move up on my reading list.