too much finance?

May 27th, 2015

Is it possible to have too much finance? Many think so, including staff of the International Monetary Fund, and my favourite columnist, Martin Wolf of the Financial Times.

We have a great deal of evidence that too much finance damages economic stability and growth, distorts the distribution of income, undermines confidence in the market economy, corrupts politics and leads to an explosive and, in all probability, ineffective rise in regulation. This ought to worry everybody. But it should be particularly worrying for those who believe most in the moral and economic virtues of competitive markets.

So what is to do be done? Here are a few preliminary answers.

Martin Wolf, “Why finance is too much of a good thing“, Financial Times, 27 May 2015 (metered paywall).

Martin suggests three goals, but provides little guidance for the very difficult problem of implementing them.

First, he writes, improve the morality of those who go into finance so that we are able to trust financiers “in much the same way” as we trust medical doctors. How do we achieve this laudable goal? Martin does not say.

Second, “reduce incentives for excessive finance” by ending “the tax deductibility of interest” and turning many debt contracts “into risk-sharing contracts”. Again, this is easier said than done.

Third, “get rid of too big to fail and too big to jail” by increasing substantially “the equity capital required of global systemically important financial institutions”. This is technically easy, but politically impossible while financiers have money and the power that comes with wealth.

Martin ends his column with a brief, two-sentence paragraph:

What is needed is not more finance, but better finance. Yes, this might also end up as substantially less finance.

No-one would disagree, other than the few who benefit from the current system. But how are we to construct a better financial system? I hope that Martin offers suggestions in a future column.

Martin Wolf, “Why finance is too much of a good thing“, Financial Times, 27 May 2015 (metered paywall).

community colleges vs for-profit colleges

May 27th, 2015

Please excuse my persistence, but I am posting a second portion of the interview with Harvard economist Claudia Goldin. The interviewer asked Professor Goldin why, in the United States, is there such a proliferation of for-profit colleges? Ms Goldin explained that the for-profits have advantages over community colleges that permit them to charge higher tuition charges and still attract students. These advantages are very important for poorly prepared, poorly funded, working students.

If you go to a community college, you may encounter various barriers; the courses you want are all full, or they’re only offered at times when you can’t attend because you have to work. Plus, many students arrive unprepared and might not have taken (or understood) algebra, for example. So they have to take remedial courses; they have to pay for these courses and find time to attend them, and yet they get no credit for them toward graduation.

But if they walk across the street to the school they’ve seen advertised on public transportation or on late-night TV, they will find a school that is going to help them apply for their Pell Grant and a student loan. It’s going to provide career counseling and it’s not going to make them take remedial courses. For-profits really know how to get people in the door. But students end up with very big bills, and those loans have to be paid off at some point.

But, do graduates of for-profit schools do well in the job market? Goldin’s finding is precisely what I would expect (No!), so is not very interesting, at least to me. What is interesting is the design of the research project set up to answer the question. Here is the intuition, in the words of Ms Goldin.

We don’t have IRS [income tax] records matched with where a person earned their degree. So what I did with David Deming, Noam Yuchtman, Amira Abulafi, and Larry Katz was to conduct an audit study. We sent out resumes designed to look like real resumes, but we varied them by where the person went to college, either a for-profit college (online or brick-and-mortar), a nonselective public college (where the students in many ways are indistinguishable from the ones who go to for-profit colleges), or a selective public college. We sent them out for two major types of jobs, business jobs and health jobs, and within those types, to jobs requiring or not requiring degrees. We then compared callback rates. Callback rates aren’t perfectly mapped onto what people eventually earn, but if people don’t get called back they’re not going to do well in the job market. We found the callback rates for business jobs were considerably lower for the candidates from the for-profit schools, particularly the online ones.

Interview/Claudia Goldin“, Federal Reserve Bank of Richmond, Econ Focus (Fourth Quarter 2014), pp. 24-28.

The research that Professor Goldin summarizes is circulating as NBER Working Paper No. 20528, issued in September 2014.

There is more of interest in the full interview, which I recommend you download and read.

women working longer

May 26th, 2015

The Federal Reserve Bank of Richmond interviewed Harvard economist Claudia Goldin for the latest issue of their quarterly magazine. One question the interviewer asked was “What are you working on currently?”. Here is Professor Goldin’s response:

My current project is called “Women Working Longer.” I’m working with a group of people who study aging, retirement, and health. We’re interested in the fact that labor force participation rates for younger women peaked in the 1990s, but that participation for older women has increased enormously. Among college graduates today, about 60 percent of those aged 60-64 and 35 percent of those aged 65-69 are in the labor force. Even among those aged 70-74, about 20 percent are in the labor force.

This raises all sorts of interesting questions about why. Is it because these women were hit with divorce shocks? Do they want to retire but then they look at their savings and realize they can’t retire? Or is it that the world of work has changed and they love what they’re doing? There are a host of issues to study concerning family, occupations, education, health, financial resources, and retirement institutions.

Interview/Claudia Goldin“, Federal Reserve Bank of Richmond, Econ Focus (Fourth Quarter 2014), pp. 24-28.

There is much more in the full interview. Claudia Goldin (born 1946) is well-known for outstanding research in economic history, particularly in the fields of education and employment. In 1990, she became the first woman to obtain a tenured post at Harvard’s economics department. She obtained her PhD at the University of Chicago and taught at the University of Pennsylvania before moving to Harvard.

Ms Goldin has appeared previously in TdJ.

See also her short autobiographical essay “The Economist as Detective,” published in Passion and Craft: Economists at Work, edited by M. Szenberg (University of Michigan Press, 1998). A link to the essay is here (at the bottom of the page).


Japanese turn away from seafood

May 26th, 2015

Globalisation is affecting eating habits in Japan. The Japanese are consuming less seafood, more beef and other meats. This is not necessarily an unwelcome trend. It does relieve pressure on the stock of fish, leaving room for increased consumption in the rest of the world.

Japan may have brought sushi and sashimi to the world’s dining tables, but its younger consumers are turning their backs on fish in favour of burgers and fried chicken. ….

Japan’s fisheries ministry is hoping that appointing Kirimichan, a popular character in the shape of a salmon fillet, as a brand ambassador will shore up demand and lure younger customers to supermarket fish counters. ….

Meat consumption per capita in Japan overtook that of fish in 2006, and according to the fisheries ministry, annual consumption of fish per person fell by a third, from a peak of 40kg in 2001 to 27kg in 2013. This compares with a world average of about 20kg. ….

The slump in Japanese fish demand comes as consumption elsewhere in the world has been booming.

Emiko Terazono and Kana Inagaki, “Japanese youth turns its back on fish“, Financial Times, 26 May 2015 (metered paywall).


why all elections are flawed

May 26th, 2015

The Conservative party in the UK recently won a clear majority of seats in Parliament with support from only 36.9% of voters, and a mere 24.4% of those eligible to vote. The new Conservative government cannot possibly reflect the ‘will of the people’, nor even the ‘will of the majority of the people’.

FT undercover economist Tim Harford explains that this result is not unexpected, since all elections are flawed. This is true even for elections that are democratic, with free speech and secret voting for politicians chosen from an open selection of candidates.

There are two deep reasons why democratic elections are always flawed.

The first is that voters are, quite rationally, rather ignorant about politics. Sensible people vote to express themselves or out of a sense of duty, not because they harbour the illusion that it might be their vote that swings the entire election. ….

The second reason is Nobel laureate Ken Arrow’s “impossibility theorem”, one of the most celebrated and misunderstood results in economics. Arrow’s theorem is often described as showing that there is no voting system that will reflect what society truly prefers. Arrow actually showed something more profound: that it makes little sense to speak of what “society truly prefers”. That very idea is incoherent. And those who expect that a democratic election will ever give society what it “truly prefers” will have to get used to disappointment.

Tim Harford, “Why democratic elections are always flawed“, Financial Times, 23 May 2015 (metered paywall).

privacy and access to knowledge

May 25th, 2015

Welcome, customers, to this column. I write articles and you subscribe to the FT and tell me how wrong I am (to be fair, some of your are kinder). Now, let us imagine you read this piece, or other FT content, for free on Facebook or Google. It is a far sweeter deal, right? You get something for nothing and Big Data can bask in its own beneficence. Apply that to any amount of diverse content. Rarely in the history of human knowledge have so few offered so much to so many for nothing. ….

But there are hidden costs. Ponder how Google and Facebook, are interacting with you. In exchange for free social networking, emails, videos, search, satellite maps and now telephone calls, they are building your profile in ever more granular detail.

Without really digesting it, we have made a Faustian bargain. They give us free computing power — beyond our wildest imagination — and we reveal ever more about ourselves. The more Google knows about you, the better it teases out preferences you never realised you had.

Edward Luce. “Big Data’s infinite harvest”, Financial Times, 25 May 2015 (metered paywall).

The FT charges for full access to content. I pay a hefty subscription fee, but suspect that the FT is nonetheless constructing my profile for commercial purposes. I may be wrong, but the suspicion lingers.

unintended consequences of invading Iraq

May 23rd, 2015

We live in difficult times. Here is an excerpt from an editorial in today’s Financial Times.

The US spent more than $40bn training and arming Iraq’s military after it disbanded the army of Saddam Hussein — an unintended but precious gift to Sunni insurgents. But the corruption and sectarianism of the government of Nouri al-Maliki, a Shia Islamist backed by the US and Iran, so hollowed out Iraq’s new army that Baghdad now relies on Shia militia, trained by Iran and blooded in the sectarian war of 2006-09 — and seen by too many Sunni as an existential threat much greater than Isis. ….

President Obama is right to insist that if “they [Iraqis] are not willing to fight for the security of their country, we cannot do that for them”. But there is not the remotest chance of turning the tide against the jihadis, in Syria or Iraq, until the Sunni feel they have a real stake in these crumbling nations and thereby in their own security. No strategy is worth discussing unless it is built around that central fact.

Menacing Isis gains in Iraq and Syria“, editorial, Financial Times, 23 May 2015 (metered paywall).

It is a pity that we cannot reset the clock, return to the pre-Blair/Bush/Cheny years, and do things differently. The consequences of the neo-conservative rush to invade, though unintended, in my opinion were predictable.

means-tests for New Zealand’s universal pension?

May 22nd, 2015

New Zealand’s Labour party is out of office, opposing the ruling centre-right National party. To my surprise, the Labour leader recently brought up the possibility of re-introducing means-tests for the country’s universal pension, known as Superannuation. Some years ago, for a short period, ‘super’ benefits were clawed back from taxpayers with high reported incomes. The income-tests proved to be very unpopular, were removed after a national referendum, and the universal pension became a dreaded ‘third rail’ that politicians – until now – feared to touch.

[Centre-left] Labour leader Andrew Little has raised the ghost of broken promises past with talk of means testing the state pension. ….

On Friday morning, during a post-Budget speech, where Opposition leaders traditionally towel the Government for its lack of vision/broken promises/miserliness/feathering of mates’ nests, he managed to blurt out something that sounded like means testing state superannuation payments [New Zealand’s universal pension].

Now we know it wasn’t that, because his office said so – and so did his finance spokesman Grant Robertson.

But when someone at the top of politics starts musing about whether it is fair that those who continue working past 65 also get the state pension it is hard to think it is anything else. [Emphasis added.]

Unless, that is, what he was nutting around was withholding super from those earning wages and salaries past 65, but not those who earn other income such as dividends, rents, business income or …. capital gains?

Does he, a Labour leader, really think someone working 40 hours a week should miss out on super but not someone earning $2000 a week from investment income? [….]

Little had better have a convincing argument, because his thoughts conjures up memories of the Lange-Bolger years and the dreaded surtax, a form of means testing the universal pension […]. Prime Minister Jim Bolger famously promised to scrap it in 1993 and then retained it – a major reason why [the centre-right National party has]… been so careful to be unequivocal about leaving super alone since they took office.

Vernon Small, “What was Andrew Little thinking?“, Stuff (Fairfax Digital), 22 May 2015.

sins of our fathers

May 21st, 2015

When will we ever learn?

On May 13 1939 the SS St Louis, a German ocean liner, set sail from Hamburg. On board were 915 Jewish refugees hoping to escape gathering oppression in Europe. There were dances and concerts aboard the luxury vessel and the indulgent captain permitted passengers to throw a tablecloth over an offending bust of Adolf Hitler. Two weeks later, the ship dropped anchor in Havana, pending what passengers, who had purchased Cuban visas, fully expected to be a warm reception. It was not to be. The Cuban authorities turned them away as, subsequently, did those of the US and Canada. The St Louis was obliged to return to Europe. An estimated quarter of its passengers ended up perishing in Nazi concentration camps.

The St Louis story is served up as a shameful indictment of our forefathers. Yet 75 years later, something just as grotesque is playing out on the azure waters of the Andaman Sea (not to mention the Mediterranean). In the past few weeks, at least 6,000 refugees have been cut adrift in the ocean, refused entry by Thailand, Malaysia and Indonesia. Some 300 have died this year, according to the UN. Dehydrated, emaciated and desperate, unless the situation changes rapidly, many more lives will be lost.

For the Rohingya, the bulk of the refugees, there are echoes of the treatment of Jews in Europe. Many are fleeing refugee centres that have been compared to concentration camps. They are a Muslim minority in Myanmar and Bangladesh.

David Pilling, “Rohingya boat people are becoming the Jews of Asia“, Financial Times, 21 May 2015 (metered paywall).

the origin of ketchup

May 20th, 2015

It was inspired by Indonesian fish and soy sauce, but evolved into a tomato sauce, without fish or soy.

Ketchup derives its name from the Indonesian fish and soy sauce kecap ikan. The names of several other Indonesian sauces also include the word kecap, pronounced KETCHUP, which means a base of dark, thick soy sauce. Why would English garum [or fish sauce] have an Indonesian name? Because the English, starting with the medieval spice trade, looked to Asia for seasoning. Many English condiments, even Worcestershire sauce, invented in the 1840s, are based on Asian ideas. ….

But the English and Americans began to move away from having fish in their ketchup. It became a mushroom sauce, a walnut sauce, or even a salted lemon sauce. These ketchups originally included salt anchovies, but as Anglo-Saxon cooking lost its boldness, cooks began to see the presence of fish as a strong flavor limiting the usefulness of the condiment. ….

Ketchup became a tomato sauce, originally called ‘tomato ketchup’ in America, which is appropriate since the tomato is an American plant, brought to Europe by Hernán Cortés, embraced in the Mediterranean, and regarded with great suspicion in the North. The first known recipe for ‘tomato ketchup’ was by a New Jersey resident. All that is certain about the date is that it had to be before 1782, the year his unfashionable loyalty to the British Crown forced him to flee to Nova Scotia.

Mark Kurlansky, Salt: A World History (Penguin Books, 2002), pp. 188-191.

HT Delanceyplace.