Archive for August, 2010

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the booming bond market

Tuesday, August 31st, 2010

Consider the situation from the point of view of those who look after these large pools of savings. These funds must be parked somewhere and, given the current state of mind of their beneficial owners, safety is prized more highly than the level of return. The corporate sector, its balance sheets stuffed with cash, has little requirement to borrow and the financial sector, once a deviser of all sorts of clever instruments that delivered triple C yields with triple A ratings, is no longer quite so creative.

The obvious strategy is to lend the money, however unenthusiastically, to the government. Investors need not lend money to all governments. A small country such as Greece, which combines a high level of debt with a sorry record of obfuscation, can be quite easily deleted from the list of suitable investment targets.

But when one comes to the major government bond markets – Treasuries, JGBs, Bunds, even gilts – it is unclear that investors have quite the same freedom. They have to put the money somewhere. All these bond markets – fiscal concerns notwithstanding – have been remarkably strong.

Jonathan Allum, “The lessons to be learnt from Japanese bonds”, Financial Times, 31 August 2010.

Jonathan Allum  is Chief Japan strategist at KBC Asset Management in London.

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age, education and employment

Sunday, August 29th, 2010

Why would any company hire a computer programmer with the wrong skills for a salary of $150,000, when it can hire a fresh graduate—with no skills—for around $60,000?  Even if it spends a month training the younger worker, the company is still far ahead. The young understand new technologies better than the old do, and are like a clean slate: they will rapidly learn the latest coding methods and techniques, and they don’t carry any “technology baggage”.  As well, the older worker likely has a family and needs to leave by 6 pm, whereas the young can pull all-nighters.

At least, that’s how the thinking goes in the tech industry. ….

For tech startups, it usually boils down to cost: most can’t even afford to pay $60K salaries, so they look for motivated, young software developers who will accept minimum wage in return for equity ownership and the opportunity to build their careers. Companies like Zoho can afford to pay market salaries, but find huge advantage in hiring young workers. In 2006, Zoho’s CEO, Sridhar Vembu, initiated an experiment  to hire 17-year-olds directly out of high school. He found that within two years, the work performance of these recruits was indistinguishable from that of their college-educated peers. Some ended up becoming superstar software developers.

Vivek Wadhwa, “Silicon Valley’s Dark Secret: It’s All About Age”, Tech Crunch, 28 August 2010

Apparently Bill Gates is not the only college dropout to have done well in the software industry.

Vivek Wadhwa is a Visiting Scholar at the School of Information at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. He actually appreciates older workers, who “tend to be more pragmatic and loyal, and to know the importance of being team players. And ego and arrogance usually fade with age. During my tech days, I hired several programmers who were over 50. They were the steadiest performers and stayed with me through the most difficult times.”

HT: The Browser.

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health care and efficiency

Sunday, August 29th, 2010

Greg Mankiw has already linked to Princeton economist Uwe Reinhardt’s thoughtful discussion of the economist’s concept of efficiency, so this post may not be necessary. I would add that Professor Reinhardt writes clearly, without jargon. You do not need a degree in economics to understand his message. And do not miss his assignment for students. Here is a brief excerpt from that assignment:

Different people can differ honorably on the ethical precepts that should be imposed upon the distribution of health care in a nation. To illustrate, in an article published in the Journal of the American Medical Association (JAMA) of November 5, 1997, I had raised in passing the following question:

“As a matter of national policy, and to the extent that a health system can make it possible, should the child of a poor American family have the same chance of avoiding preventable illness or of being cured from a given illness as does the child of a rich American family?”

Of the several readers who responded to that question, only one, Richard A. Epstein, LLB, Distinguished Professor of Law of the University of Chicago, answered it forthrightly. He wrote:

“The correct answer is no. … His proposal for equal medical treatment perversely requires more care to children of poor parents than to children of rich ones, precisely because the rich families can more easily avoid injury or illness and can better pick up any slack in health care delivery. Worse, programmatic success depends not just on offering carrots but wielding sticks in overriding parental judgments on children’s food, lifestyle and education.” (JAMA, vol. 279, No. 10, March 11, 1998.; p. 745.)

I do not share Professor Epstein’s view on children in society. Indeed, I had answered my own question in this commentary in the affirmative, on the assumption that we in America aspire to an “equal opportunity” society. Good health is part of that opportunity. But I respect Professor Epstein immensely for having had the courtesy and courage to answer my question so forthrightly.

Uwe E. Reinhardt, HOMEWORK ASSIGNMENT NO. 4, ECON 100/FALL 2005.

Reinhardt’s blog post is “When Value Judgments Masquerade as Science”, Economix, 27 August 2010, where there is a link to this assignment.

Posted in Health Economics, Political Economy | Comments Off

what would Milton Friedman say?

Saturday, August 28th, 2010

Scott Sumner is “appalled” (his word) by US conservative opposition to loose monetary policy in the current recession.

After my recent trip I was appalled to discover the number of leading conservative voices opposing monetary easing.  Even worse, many seemed to assume the Fed was already engaged in monetary stimulus.  Before considering their views, let’s examine the thoughts of the greatest conservative monetary economist of all time, Milton Friedman.  Here he discusses the zero rate problem in Japan:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

[...]

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

Friedman was absolutely right, near-zero interest rates are an almost foolproof indicator that money has been too tight.  Were he still alive, I can’t even imagine what he would think of the views being expressed by his fellow conservatives.

[snip]

I agree that Obama’s economic policies are highly counterproductive.  But unlike some conservatives I am not willing to unemploy millions of workers to win a policy argument.  I guess that’s the difference between hard core conservatives and pragmatic classical liberals like Friedman and I.

Scott Sumner, “Milton Friedman vs. the conservatives”, The Money Illusion, 24 August 2010.

HT: Clive Crook

Do read the entire post, and don’t miss Sumner’s parting shot:

BTW, when I researched the Great Depression, I was shocked at how the conservative Wall Street establishment hated dollar devaluation, despite the fact that the stock market obviously loved it.  I noted (to myself) that “at least the modern WSJ is much better; they often use the market reaction to policy announcements as a way of establishing their likely effects.”  I guess the WSJ has reverted back to the primitive pattern of the 1930s.  “Yes, the markets are screaming for easier money, probably because it will boost the economy.  But we can’t have that because it might make Obamanomics look successful.”  Plus ca change . . .

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“beggar-my-neighbour” economics

Friday, August 27th, 2010

Samuel Brittan looks at the export promotion policies of David Cameron, and does not like what he sees.

The academic name for the economic policy into which the British prime minister has stumbled is “mercantilism”. ….

But I now think the best name is “beggar-my-neighbour” economics. This was coined by the leftwing Cambridge economist Joan Robinson – no market fundamentalist she. By this she meant that because governments were unwilling or unable to promote output and employment by domestic means they had to resort to trying to promote it at the expense of other countries. ….

The current prime minister is partly following in the footsteps of Tony Blair; but while the latter’s soft protectionism was concentrated on the arms industry, Mr Cameron is trying to spread the net much wider. Do I have to add that not every country can have an export surplus?  ….

Mr Cameron is consciously or not echoing the sentiment of Calvin Coolidge, US president in the mid-1920s, that “the chief business of the American people is business”. But Coolidge also said many much wiser things, such as: “I have never been hurt by what I have not said”, and: “Four-fifths of our troubles would disappear, if we would only sit down and keep still.”

Samuel Brittan, “The return of beggar-my-neighbour policy”, Financial Times, 27 August 2010.

For those who do not subscribe to the FT, all of Brittan’s columns are eventually posted here.

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Cuba fact of the day

Thursday, August 26th, 2010

Raul Castro is removing cigarettes from the ration books of Cubans.

All Cubans 55 or older are allocated four packs of cigarettes a month for about 25% the normal price, but this privilege is being ended in September.

The measure is President Raul Castro’s latest attempt to cut the communist state’s spending. ….

Cigarettes are the latest item to be removed from ration books. Subsidised peas and potatoes were eliminated in November.

“Cuba to withdraw cheap cigarettes for elderly”, BBC News, 26 August 2010.

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Venezuela fact of the day

Thursday, August 26th, 2010

Some here [in Caracas] joke that they might be safer if they lived in Baghdad. The numbers bear them out.

In Iraq, a country with about the same population as Venezuela, there were 4,644 civilian deaths from violence in 2009, according to Iraq Body Count; in Venezuela that year, the number of murders climbed above 16,000.

Even Mexico’s infamous drug war has claimed fewer lives. ….

As Mr. Chávez’s government often points out, Venezuela’s crime problem did not emerge overnight, and the concern over murders preceded his rise to power.

But scholars here describe the climb in homicides in the past decade as unprecedented in Venezuelan history; the number of homicides last year was more than three times higher than when Mr. Chávez was elected in 1998.

Simon Romero, “Venezuela, More Deadly Than Iraq, Wonders Why”, New York Times, 23 August 2010.

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New Zealand’s universal pension

Wednesday, August 25th, 2010

New Zealand has a unique system of provision for retirement income – unique, at least, in the OECD. Every resident aged 65 or older receives the same basic pension, regardless of his or her assets, history of earnings, or current income. There is no requirement that a person actually retire from work to receive the pension. Pension income is taxable, the same as other income, so net pensions are smaller than gross pensions. These public pensions are financed from general government revenue. There are no taxes or ‘contributions’ earmarked for pensions. A key feature of the NZ system is the absence of compulsion. (Taxes of course are compulsory. I refer to compulsory saving or contributions to a pension scheme.) Each citizen is free to save in the way he or she prefers. This can be as simple as paying off consumer debt or a mortgage as preparation for retirement, building a business, or getting an education in order to boost earnings.

Governments everywhere love the idea of compulsory retirement saving, and New Zealand is no exception. This is one issue on which political parties seem to enjoy consensus. The politicians, so far, have been unable to sell New Zealand voters on the idea, but they keep trying. The danger of mandated contributions is that they can threaten universal, basic pensions. Once citizens are forced to contribute to a pension scheme, the next step is likely to be means-testing the basic pension and reducing its size, turning it into a form of poverty relief. The government of New Zealand, following the launch of a subsidised – but voluntary – KiwiSaver, now seems bent once again on mandating participation in a retirement saving scheme . This worries Michael Littlewood.

It looks like we’ll have another inquiry into private provision for retirement, apparently aimed at making this compulsory. Despite the Government’s insistence that it wants to debate the issues, the review’s direction is clear. Other political parties are also getting in behind.

I used to be a strong advocate of compulsion, once even calling for National Superannuation, as it then was, to be “privatised”. And I didn’t even question whether tax breaks for retirement saving schemes were a good idea – I just assumed they were. I was probably asked to join the 1992 Task Force on Private Provision for Retirement (the first Todd Task Force) because the Government wanted our answer to be “compulsion” – much like the current Government’s objective.

During 1991-92, I spent 15 months helping to review the evidence, debate the issues and lay all that out in three comprehensive reports …. I wasn’t rolled on the issue of compulsion but was turned against it – I was converted.

Michael Littlewood, “Our road to security”, New Zealand Listener, 28 August 2010, pp. 26-27.

I predict that Michael Littlewood, co-director of the University of Auckland’s Retirement Policy and Research Centre and principal editor of www.pensionreforms.com, will not be invited to participate in the next task force on private provision for retirement. The government already has the answer to its query, and Michael’s answer is wrong.

Posted in Pensions, Universal Transfers | 1 Comment »

the housing boom and bust

Tuesday, August 24th, 2010

The New York Times has an interesting article on the psychological effects of the bust that followed the recent housing boom.

“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”

Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.

Dean Baker, co-director of the Center for Economic and Policy Research, [says] … “People shouldn’t look at a home as a way to make money because it won’t”. ….

For the first half of the 20th century, he [Yale economist Robert Shiller] said, … [h]ouses were seen the way cars are now: as a consumer durable that the buyer eventually used up.

The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom.

David Streitfeld, “Housing Fades as a Means to Build Wealth, Analysts Say”, New York Times, 23 August 2010.

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Social Security reform, once again

Monday, August 23rd, 2010

The US contributory public pensions system, known as “Social Security” is celebrating its 75th birthday, so the New York Times invited six experts for opinions on how to avoid a crisis with the impending retirement of the baby boom generation. Curiously, there is no discussion of the crisis in non-contributory pensions, known as “Supplement Security Income”, which leave large numbers of elderly in poverty. As for the contributory system: Crisis, what crisis? Financial journalist Roger Lowenstein, in his contribution, gets it exactly right:

Actually, Social Security is not that bad off. It is in much better shape than state and local pensions or Medicare. In fact, it is in better shape than the rest of the federal budget, which has been borrowing the surplus that Social Security accumulated over many years and is now fretting because it will soon have to pay the money back.

Roger Lowenstein, “The Fix: Plenty of Young People”, New York Times, 22 August 2010.

Lowenstein, a former Wall Street Journal columnist, is author of While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis (Penguin Press, 2008)

Lowenstein’s contribution, like all but one of the other invited contributions, is brief, sensible and worth reading. The one piece that is not worth reading, in my opinion, is that written by historian Bruce Bartlett (1951-). Bartlett is worried that large numbers of people retire at the earliest possible moment, rather than wait for “normal retirement age”. Normal retirement age increased recently from 65 to 66, and will soon increase further to age 67. Bartlett believes that saving Social Security requires an increase in the early retirement age, which remains pegged at 62 years.

What many people may not realize is that Social Security benefits are actuarially adjusted so that people get roughly the same lifetime benefits regardless of when they retire from age 62 to 70, so if you start earlier, you receive a smaller monthly check. ….

The actuarial adjustment … means that when people delay retirement it doesn’t save Social Security anything in the long run. …. Consequently, if the goal is to reduce Social Security’s long-term financing problem, we need to think seriously about raising the early retirement age.

Bruce Bartlett, “62 Is Too Young”, New York Times, 22 August 2010.

Bartlett’s reasoning is fine until the last sentence. Precisely because delaying retirement “doesn’t save Social Security anything in the long run”, raising the early retirement age from 62 to 63 or higher cannot have any effect on Social Security’s long-term financing. It might affect GDP, by encouraging people to remain longer in the labour force, but Bartlett does not mention this possibility.

Bartlett was a domestic policy adviser to President Ronald Reagan and was a Treasury official in the government of George H.W. Bush. He is author of numerous books, including Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy (Doubleday, 2006).

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