Author Archive for John Barrdear

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The origins of ideology

Published on 8 April 2011 in Culture, Economics, Politics and USA. Tags: , , , , , . 0 Comments

With the US Federal Government looking like it might go into a shutdown over budget negotiations (as I type, Intrade puts the chance at 40%), you can expect to see more articles around like this one from the Economist’s Democracy in America.  Here’s the gist of what they’re saying:

As Steve Benen points out, it definitely isn’t (or isn’t just) a function of Democratic legislators’ lack of determination. It’s partly a function of the fact that, as recentNBC/Wall Street Journal, Pew, and Gallup polls show, Democratic voters want their leaders to compromise, while Republican voters don’t. Jonathan Chait argues that what we have here is a structural issue that forces Democratic politicians to be wimpy:

Most people have the default assumption that the two parties are essentially mirror images of each other. But there are a lot of asymmetries between the Democratic and Republican parties that result in non-parallel behavior. The Republicans have a fairly unified economic base consisting of business and high-income individuals, whereas Democrats balance between business, labor, and environmental groups. The Republican Party reflects the ideology of movement conservatism, while the Democratic Party is a balance between progressives and moderates.

The upshot is that the Democratic Party is far more dependent upon the votes of moderates, who think of themselves in non-ideological terms and want their leaders to compromise and act pragmatically. The reason you see greater levels of partisan discipline and simple will to power in the GOP is that it has a coherent voting base willing to supportaggressive, partisan behavior and Democrats don’t. This isn’t to say Democrats are always wimps, but wimpiness is much more of a default setting for Democrats.

The article then goes on to discuss the psychological origins of ideological allegiance.  The upshot is that certain people have certain preferences and the political parties are representations of those groups of people.  There’s an implied assumption that all of this is exogenous to the system at large; that there’s nothing you can do about it, you just need to take it as given in your deliberations.

For anybody interested in this stuff, I strongly encourage you read Steve Waldman’s opposing view:  ”Endogenize Ideology“. Here is his basic point, from quotes arranged in a different order to that in which he provides them:

Many [people] treat ideology or “political constraints” as given, and perform the exercise that economists perform reflexively, starting with their first grad school exam: constrained optimization. Constrained optimization is a mechanical procedure. The outcome is fully determined by the objective function and the constraints.

However …

That’s the wrong approach, I think. Rather than treating ideology as fixed and given, we should treat it as dynamic, as a consequence rather than a constraint of policy choices.

Ultimately, he argues, in a world of hard-nosed ideologues versus constraint-respecting policy wonks …

Rather than two optimizers, one of which has strictly less information than the other, in the real world we’ve seen two satisficers, one of which has adopted the strategy of optimizing subject to fixed constraints and the other of which has neglected pursuit of optimal present policy in favor of action intended to reshape the constraint set. A priori, we would not be able state with certainty which of the satisficers would outperform the other. If the constraint set were, in fact, strongly resistant to change Team Obama’s strategy would dominate. But if the constraint set is malleable (and constraints frequently bind), then Team Bush outperforms.

Just to really kick it home, he pulls out this quote from Karl Rove:

[Probably Karl Rove, talking to Ron Suskind] said that guys like me were ”in what we call the reality-based community,” which he defined as people who ”believe that solutions emerge from your judicious study of discernible reality.” I nodded and murmured something about enlightenment principles and empiricism. He cut me off. ”That’s not the way the world really works anymore,” he continued. ”We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality — judiciously, as you will — we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors . . . and you, all of you, will be left to just study what we do.”

The ECB starts raising interest rates (updated)

Published on 7 April 2011 in Economics, Europe, Finance and UK. Tags: , , , , , , , , , . 0 Comments

[Updated to include labour cost inflation too]

Here are the stories at the FT, the WSJ, the Economist (in their blogs) and for a won’t-somebody-think-of-the-children perspective, the Guardian [1].

There are plenty of arguments against the increase.  You could argue that there’s a sizeable output gap, so any inflation now is unlikely to be persistent.  You could argue that core inflation is low and that it’s only the headline rate that’s high.  You could argue that with the periphery countries facing fiscal crises, they need desperately to grow in order to avoid a default or, worse, a breakup of the Euro area.  You could argue that a period of above-average inflation in Europe’s core economies and below-average inflation in the periphery would allow the latter to (slowly) achieve what a currency devaluation would normally do:  make them more competitive, attract business and allow them to grow in the long run (above and beyond the short-run stimulus of low interest rates).

On that last point, though, it’s worth looking at the data.  It’s a great idea, in principle, but unfortunately and despite all the austerity packages, the data show exactly the opposite picture at present.  Here’s the current year-over-year inflation rate broken down by country, from Eurostat (HICP and Labour Costs):

 

 

Economy HICP Labour Cost Index
Euro area as a whole 2.4% 2.0%
Germany 2.2% 0.1%
France 1.8% 1.5%
Greece 4.2% 11.7%
Ireland 0.9% n/a
Portugal 3.5% 1.0%
Spain 3.4% 4.1%

 

 

For some reason Ireland doesn’t seem to be included in the Labour Cost data.  Look at Greece and Spain.  They’re getting more expensive to do business in relative to Germany and France.  Portugal is in the right area, but with Germany’s growth rate in Labour Costs so low, they’re still coming out worse.  The same story is painted in consumer inflation.  It looks like Ireland is doing what it needs to, but Greece, Portugal and Spain are all getting even less competitive.

Here’s my theory:  The ECB hates the fact that they’re temporarily funding these governments, but can’t avoid that fact.  Furthermore, they reckon that Greece, Ireland and Portugal are eventually going to restructure their debt.  Given that they cannot shove the temporary funding off onto some other European institution, the ECB either doesn’t care whether it’s in 2013 or today (they’ve already got the emergency liquidity out there and it can just stay there until the mess is cleaned up) or quietly wants them to do it now and get it over with.  Either way, the ECB is going to conduct policy conditional on the assumption that it’s as good as done.

 

[1]  Just kidding, Guardian readers.  You know I love you.  Mind you, the writing in that article could have been better — it says that inflation has gone above the ECB’s target of 2% and never mentions what it actually is, but later mentions the current British inflation rate (4.4%) without explaining that it is for Britain and not the Euro area.

Running (February 2011)

Published on 1 March 2011 in Health Care and Personal. Tags: . 0 Comments

My resumption of running continues.  February managed to nail January in both distance and pace.

Count:  14 runs (January was 16)

Distance:  100km (January was 94km)

Av. Pace:  5:39/km (January was 5:59/km)

I’ve now managed over 200km in total, which was #5 of my running goals, and which also makes this the best block of running I’ve had in terms of total distance for over 13 years:

All exercise is publicly visible here (on runkeeper.com).

Seasonal adjustments to unemployment in the USA

Published on 10 February 2011 in Economics and USA. Tags: , , . 0 Comments

I might as well put this here.  Brad DeLong writes:

Microsoft Excel.png

Put me down as somebody who does not believe that the seasonal factor in the unemployment rate is twice as big today as it was four short years ago, or was half as big four short years ago as it was in the early 1990s…

Not that I am complaining about the BLS, you understand. If I could do better, they would already have done better. Nevertheless this is a source of nervousness…

My first thoughts:

At a first glance, the size of the seasonal adjustment factor looks like it is countercyclical to the business cycle, which immediately raises the question: Why would seasonality-based volatility in unemployment increase during a recession?

Could it just be that seasonal employment is less susceptible to business cycle movements than regular employment, so that during a recession the (relatively constant) seasonal movements look larger relative to the smaller total employment number?

Running (January 2011)

Published on 31 January 2011 in Health Care and Personal. Tags: . 0 Comments

I resumed my stop-start relationship with running on Christmas Day.  January has been my best month for running in over 12 years (I’ve lost all records prior to 1998).

Count:  16 runs (previous best was 13 in Feb 1998, Jul 1998 and Aug 2008).

Distance:  94km (previous best was 74km in Feb 1998, followed by 69km in Aug 2008).

Av. Pace:  5:59/km (Feb 1998 was 5:05/km, but we’ll ignore that for now).

I’ve now hit 100km in total, too, which brings up #2 on my running goals.

All exercise is publicly visible here (on runkeeper.com).  I’m finding the chatter with a mate and one of my brothers (the other being a lazy git) in Australia to be a real help.

Some brief thoughts on QE2

Published on 4 November 2010 in Economics, Finance and USA. Tags: , , , , , , , , . 0 Comments
  • Instead of speaking about “the interest rate” or even “the yield curve”, I wish people would speak more frequently about the yield surface:  put duration on the x-axis, per-period default risk on the y-axis and the yield on the z-axis.  Banks do not just borrow short and lend long; they also borrow safe and lend risky.
  • Liquidity is not uniform over the duration-instantaneous-default-risk space.   Liquidity is not even monotonic over the duration-instantaneous-default-risk space.
  • There is still a trade-off for the Fed in wanting lower interest rates for long-duration, medium-to-high-risk borrowers to spur the economy and wanting a steep yield surface to help banks with weak balance sheets improve their standing.
  • By keeping IOR above the overnight rate, the Fed is sterilising their own QE (the newly-injected cash will stay parked in reserve accounts) and the sole remaining effect, as pointed out by Brad DeLong, is through a “correction” for any premiums demanded for duration risk.
  • Nevertheless, packaging the new QE as a collection of monthly purchases grants the Fed future policy flexibility, as they can always declare that it will be cut off after only X months or will be extended to Y months.
  • It seems fairly clear to me that the announcement was by-and-large expected and so “priced in” (e.g. James Hamilton), but there was still something of a surprise (it was somewhat greater easing than was expected) (e.g. Scott Sumner).
  • Menzie Chinn thinks there is a bit of a puzzle in that while bond markets had almost entirely priced it in, fx-rate markets (particularly USD-EUR) seemed to move a lot.  I’m not entirely sure that I buy his argument, as I’m not entirely sure why we should expect the size of the response to a monetary surprise to be the same in each market.

WTF?

Published on 21 September 2010 in Economics, Labour, Personal and UK. Tags: , , , . 1 Comment

I just got this email from the careers service here at LSE (emphasis mine):

A Conservative MP is looking for support in his role on the Public Accounts Select Committee.

The position is paid £7.85 p/h and will be for approx 15 hours per week.

The successful candidate must have excellent financial understanding in order to examine and analyse accounts.

The candidate should be inquisitive and have an interest in challenging public accounts.

The candidate should also be able to draft their findings into concise briefings and press releases.

To apply please send your CV and covering letter (1 page max) to XXXX by email XXXX@lse.ac.uk ASAP

£7.85 per hour?  Are they kidding?  They’re sending this to every economics Ph.D. candidate at the London School of Economics?  What the f*** are they thinking?  (the first person to say “non-monetary incentives” gets a clip ’round the ear)

Update 23 September 2010: Professor Frank Cowell, over on facebook, points us towards:

Gneezy, U. and Rustichini, A. (2000) “Pay Enough or Don’t Pay at All“, Quarterly Journal of Economics, 115, pp. 791-810.

Here’s the abstract:

Economists usually assume that monetary incentives improve performance, and psychologists claim that the opposite may happen. We present and discuss a set of experiments designed to test these contrasting claims. We found that the effect of monetary compensation on performance was not monotonic. In the treatments in which money was offered, a larger amount yielded a higher performance. However, offering money did not always produce an improvement: subjects who were offered monetary incentives performed more poorly than those who were offered no compensation. Several possible interpretations of the results are discussed.

France is set to ban the burqa and niqab

Published on 15 September 2010 in Europe, Justice/Law, Politics and Welfare. Tags: , , , , , . 0 Comments

The French Senate has passed the bill after the General Assembly (lower house) did in July.  From that HuffPo piece in July:

Officials have taken pains to craft language that does not single out Muslims. While the proposed legislation is colloquially referred to as the “anti-burqa law,” it is officially called “the bill to forbid concealing one’s face in public.”

It refers neither to Islam nor to veils. Officials insist the law against face-covering is not discriminatory because it would apply to everyone, not just Muslims. Yet they cite a host of exceptions, including motorcycle helmets, or masks for health reasons, fencing, skiing or carnivals.

I’d really like to read a literal translation of the bill.  I’m curious whether it effectively also bans this sort of thing or this sort of thing.  Do French citizens have a right to privacy?  Wouldn’t this bill violate such a right?

“The writing style is academic and upset most of the time.”

Published on 14 September 2010 in Humour, Meta and Personal. Tags: . 3 Comments

*sniff*

Then again, Urlai also thinks that I’m over 66 years old.

Basel III will help fix the Euro

Published on 13 September 2010 in Economics, Europe and Politics. Tags: , , , , , , . 3 Comments

The Basel III compromise is out.  Via Free Exchange, you can read the text here.  Or you can just look at the BIS’s handy-dandy little chart:

Let me quote Ryan at Free Exchange:

The minimum common equity requirement has been increased from 2% to 4.5%. Common equilty is what is called “core” Tier 1 capital. Regulators have agreed on an additional 2.5% “conservation buffer”. Most large banks will likely maintain such a buffer, as falling below it will lead to additional regulatory scrutiny. The likely impact, then, is a pretty substantial increase in the common equity reserves banks need to hold.

What he said. Anyway …

The asterisk on the countercyclical buffer has this note against it: “Common equity or other fully loss absorbing capital”.  Here’s some more detail, from the press release itself:

A countercyclical buffer within a range of 0% – 2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances. The purpose of the countercyclical buffer is to achieve the broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth. For any given country, this buffer will only be in effect when there is excess credit growth that is resulting in a system wide build up of risk. The countercyclical buffer, when in effect, would be introduced as an extension of the conservation buffer range.

In other words, the countercyclical buffer is expressly designed to allow for different rates of credit expansion across different countries.  This is excellent news for the Euro area, because (as I mentioned previously) it explicitly allows — heck, even encourages! — individual member countries to re-assert some control over monetary policy.  Remember that the level of credit in an economy is not just affected by demand for the stuff (which is itself influenced largely through interest rates), but also through the supply of the stuff, which falls under the umbrella of macro-prudential regulation (since, it is assumed, banks will generally supply all the credit they can subject to the restrictions of capital adequacy regulations).  The former may remain the remit of the ECB, but the latter can be economy-specific.

This is arguably desirable because, since the Euro-area economies are not perfectly synchronised, we have for many years seen monetary policy be overly tight for low-inflation countries like Germany and overly lax for high-inflation countries like Spain.

To some extent, one might view Germany’s reluctance to accept tighter capital requirements as evidence that they have been tacitly using this logic all along:  that is, they were already compensating for the (to them) overly-high interest rate with relatively lenient policies on the supply side.  To a German’s mind, it may therefore appear that with these higher minimum ratios, a neutral position for the German economy will require lower interest rates on average than previously prevailed.

The risk, from the Germans’ point of view, is that in a Eurozone world with higher capital ratios but lower interest rates, countries like Spain may be tempted to avoid making use of the countercyclical buffer and so may still end up with faster-than-ideal credit expansion.  How to convince the central banks and/or regulatory authorities in Mediterranean countries to be financially conservative, even when their governments aren’t, is clearly the next challenge.