Thank you Captain Obvious

Filed under: covid, econ, news, politics — jlm @ 17:14

From Jobless claims jump by 70,000 as virus starts to take hold (San Francisco Gate, by Martin Crutsinger via AP):

“The more aggressive coronavirus containment measures imposed in recent days involving the near total shutdown of the retail, leisure and travel sectors in some parts of the country are clearly starting to have a dramatic impact,” said Andrew Hunter, senior U.S. economist at Capital Economics.

Ya think?


Would the HMS Boaty McBoatface have been an EU vessel?

Filed under: econ, politics — jlm @ 19:45

Not long before the referendum on whether Britain should leave the EU, there was a plebiscite about what to name its newest oceanographic research vessel. To the amusement of the rest of the world, the winning name was ‘Boaty McBoatface’. However, that election result was not enacted, whereas the UK government is treating the Brexit election result as binding. The rest of the world, at least as judged by its various stock markets, was not amused.

On the news there’s been a lot of talk about the so-called ‘regrexit’ theory that many Britons who voted ‘Leave’ were casting ‘protest votes’: expecting that ‘Remain’ would win by a significant margin (despite the polls), they felt their votes wouldn’t affect the election’s result, so even though they wanted ‘Remain’ to win, they voted ‘Leave’ as a signal of their dissatisfaction of the status quo. So, what if the UK government had enacted the earlier vote? If the British had had to put up with having their premier oceanographic ship being named Boaty McBoatface to the derision of the rest of the oceanographic community, that would have been a lesson that votes do matter. If the regrexit theory is correct, then the English are learning that lesson with the very consequential Brexit vote, and it’d have been much better if they’d have learned it from the vote about the boat.

However, it’s worth considering the possibility that the regrexit theory is wrong and the English aren’t as dumb as they look. Sure, the finance sector is going to see a lot of its jobs move to Paris, Dublin, Brussels, etc., but most Britons don’t work in finance, and I’m betting that majority thought they would like the consequences of a weaker pound: British goods now appear cheaper to the rest of the world, so British manufacturing will see a boost, and that’s enough reason to vote ‘aye’ on the Exit. This argument doesn’t get much traction from economists, but those who believe it are sincere in their ‘Leave’ votes — even if you can easily counter it, it’s by no means a frivolous argument.

OK, the economic ramifications of the Brexit can (and surely will) fill a book, but what about the political ramifications? I find it stunning that one of the most powerful positions in the world, the prime minister of the UK, is now one which seemingly no-one wants! David Cameron has announced that he’s going to resign. Boris Johnson, Brexit’s most prominent cheerleader and Cameron’s expected successor, has said he’s not going to run. I expected him to be waltzing his way to 10 Downing St. on rhetoric of how Brexit was the first step to Britain’s upcoming new golden age. Nigel Farage, head of the UKIP, who has just led that party to the achievement of its primary raison d’etre (huge success!), is resigning his post. Regrexit appears to strike these politicians hard. Why aren’t Johnson and Farage, the ostensible winners here, riding their chariot in a victory lap? Instead they’re slinking off as if they lost. I do not understand this.


Economics is the dismal science because people don’t think it’s a science

Filed under: econ — jlm @ 11:13

So, here I am, reading this article on the FDA proposing rules on “e-cigs”, and come across this:

Some smokers use e-cigarettes as a way to quit smoking tobacco, or to cut down. However, there’s not much scientific evidence showing e-cigarettes help smokers quit or smoke less, and it’s unclear how safe they are.

… Tobacco company executives have noted that they are eating into traditional cigarette sales, and their companies have jumped into the business.

That sure sounds like economic evidence that they help people to smoke tobacco less.


Incentives in action: Airport tarmac delays

Filed under: econ — jlm @ 09:50

When the New York airports re-opened following the recent blizzard, there was a backlog of flights, and short-staffed airline terminal support personnel couldn’t process them as fast as they arrived. Which planes do you think got serviced, and which delayed on the tarmac for hour after hour?

It’s no surprise if you know that the rule put into effect after repeated and persistent multi-hour tarmac delays by the airlines applies only to domestic flights. Miraculously, just enough personnel were found to keep the domestic flights coming to the gates without hitting the delay lengths which would trigger fines — but not enough to service the international flights, for which there are no tarmac delay penalties.

And that’s why the flight from Vancouver, BC to Kennedy Airport sat on the tarmac for over 12 hours. Airlines had no incentive to service it, but did have an incentive to prioritize domestic flights over it. Corporations don’t feel shame or guilt for bad behavior, but they do feel the sting of fines and act to avoid them. We need to choose our incentives carefully.


Economic musings

Filed under: econ, philosophy — jlm @ 20:05

There’s been noise and worry about deflation lately. The fear deflation sparks has always seemed strange to me, with the industry I know best — electronics — being both very energetic and highly deflationary. I’m familiar with the theory of how a deflationary spiral saps economic growth, with Japan’s economy being the prime example.

But looking closer at Japan’s economy: It was “stagnant”, by which economists mean its production was steady, and that steady production was actually quite high. If it weren’t economics, meeting an objective well and steadily would be considered very good, but the norm for economics is growth, so steady first-world level production is considered a failure. (Coming out of a deep recession, a steady production level doesn’t sound that bad after all.)

How much production do we want? Is this even the right question? I’m remembering Dijkstra’s complaint that programmers were proud of how large a program they had written, when instead they should have been ashamed at needing so much code to accomplish their goal. Is GDP as faulty a metric as LOC? Instead of being proud that we produce $47,000 while Japan only manages $33,000, should we instead be looking at why it takes us $47,000 to have a full and fulfilling life while Japan only needs $33,000? Are we really full and fulfilled with our lives, and getting a better life out of that $47,000 than Japan is out of its $33,000? Is increasing that number to $50,000 the best way to improve our lives? Or is there a better measurement that we should be looking at? Certainly more GDP helps immensely, it gives us more resources to spend on our goals, but I worry that treating GDP itself as the goal, we foolishly sacrifice “life value” for GDP, instead of spending our GDP to improve our lives.


Derivatives and subprime mortgages

Filed under: econ — jlm @ 09:17

So, I’ve been pondering the market crash. (It seems like the only stuff on the news are it and the presidential campaign.) The mortgage failures which started it took down more than just the banks which unwisely made excessive subprime loans because these mortgages were bundled up and sold as securities, exposing other firms. Financial corporations then made derivative securities on them, instruments which would provide a payment if some fraction of the mortgage holders did (a “CDO”) or didn’t (a “CDS”) make their payments. They even took bunches of CDOs and made “secondary CDOs” from them.

The theory behind the secondary CDOs was that mortgages fail now and then, so the high-risk CDOs will fail now and then when they do. But, just by chance, a more-than-usual number of mortgage failures will cluster in one CDO and make it fail, while other seemingly identical CDOs continue to pay — sucks if you held the unlucky CDO. The secondary CDOs protect against the phenomenon of chance clustering, but as we saw, they’re completely vulnerable to coordinated failures. (The rating agencies foolishly assumed mortgage failures were mostly independent, but in fact they’re highly correlated with each other, and in the presence of correlation, secondary CDOs have more risk, because they also “protect” you from chance putting an atypical number of good mortgages in your pool, which saves some primary CDOs when the market-wide failure rate would have been enough to take them down.)

Everything came tumbling down because many firms were exposed to mortgage failures through these derivatives. But aren’t derivatives supposed to be good for markets? Because they let people buy and sell risk, they thicken the market by bringing in traders who want different risk profiles. If people start worrying, they can hedge; without derivatives, you can only sell off.

I think that derivatives did bolster the market here. But subprime mortgage instruments are a market that deserved to fail, and should have failed much sooner. Derivatives held the market up, spreading the risk wider and wider, until there was nobody left to underwrite hedges, and the collapse of the market pulled these exposed firms down with it. Without derivatives, the failure of the subprime market would have come sooner, and had less impact, taking down only the mortgage traders. It’s good to stabilize markets which shouldn’t fail. But some markets should fail, and spreading exposure to these markets far and wide is a bad thing indeed.

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