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Posts tagged with economics

Summary: skip to the pictures after the <big> text under heading 2.

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Since 2009, pundits have concerned themselves with economic inequality. Robert Reich’s infographic about the US I’ll treat as a summary.

Let me dummyise the opinionscape into three camps:

  1. John Galt. The etymology of aristo-cracy is “rule by the best people”. The market rewards output fairly. Tax the best people and you will drive them out of France and into perfect stateless seasteads. Lose them and you’ll be sorry.
  2. Maximilien de Robespierre. F—k the rich. They inherited their way to the top. Connections, luck, brown-nosing, and false confidence determine incomes more than "merit". The middle manager is no better than his underling. The applicant who got the job is no better than another applicant who was ignored. Guillotine the superfluous gentleman, the role will still be filled; the new girl may even do it better.
  3. Vilfredo Pareto. Hey—if the rich aren’t actively making the poor worse off, what does it matter?

The third view is the one I want to challenge just now.

image

When I see a manual farmer being destroyed by Nature, I feel:

  • privileged
  • guilty
  • sorry for the farmer
  • the longer I spent thinking about their suffering, the sorrier I feel
  • Why doesn’t somebody do something? They don’t need much. They just need a little help.
  • This is so unfair.

And somehow, gut reactions are part of real morality and ethics.

 

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So here’s my challenge to the Paretians. Which image galls you more:

  1. a farmer suffering from drought, with the whole community destroyed—families crying into each other in solidarity as they all lost pretty much everything
    http://upload.wikimedia.org/wikipedia/commons/5/54/Lange-MigrantMother02.jpg
    , or…
  2. next to the damned farmers weeping on their knees, stands the Monopoly Man, laughing, swirling a flute of champagne and recounting the fable of the grasshopper and the ant.

http://newsimg.bbc.co.uk/media/images/45437000/jpg/_45437836_farmerindiaafpgetty466.jpg
http://rootsblog.typepad.com/.a/6a00d834520e4069e2010534c9b759970b-pi
http://www.jesus-is-savior.com/Reaching_The_World/homeless_man.jpg
http://i182.photobucket.com/albums/x119/xofferson/monopoly_man-13539.jpg

http://www.tehelka.com/wp-content/uploads/2014/03/img26.jpg
http://slwakes.files.wordpress.com/2011/01/4209433153_f9c6877925_o.jpg?w=295&h=300
http://www.thiscantbehappening.net/sites/default/files/images/Officer%20Deprimo.jpg

To the extent that these gut reactions translate into legitimate morals, the Robespierreans win over the Galtists and over the Paretians.

http://24.media.tumblr.com/tumblr_m90j5qEmAd1rb86ldo1_400.jpg

Envy exists. From this one infers that when the rich get richer but the poor don’t, that their individual utilities can still drop. But let’s go beyond society-as-a-collection-of-independent-individuals.

http://theeconomiccollapseblog.com/wp-content/uploads/2010/03/Rich-Getting-Richer.jpg

The image of the Monopoly Man merrily dancing next to the poor (or even indifferently ignoring their plight) curdles the blood. Gucci little piggies go first against the wall for a reason.

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Advertising rises and falls with the economy, though how much is a matter of debate. Randall Rothenberg … points to the remarkable stability of advertising at about 2% of GDP since 1919, when the data began to be collected.

(Source: economist.com)




I’m not the first person to say "ceteris paribus is a lie". What this aphorism means is that if you make a c.p. assumption in order to think something through, then the conclusion you reach may be irrelevant to the real world.

http://cruel.org/econthought/essays/paretian/image/paretwo2.gif

Worse, because people don’t understand models, someone might take your careful “A implies B” statement to mean “Both A and B are the case”. For example rather than Edgeworth boxes implying that trade be always mutually beneficial, people might take you to mean that

  1. exchange is characterised by Edgeworth boxes
  2. private transactions are always Pareto optimal

which is not at all what the theory’s saying. The theory is just connecting assumptions to conclusion: yes, if this were true, then that would surely follow. Which is great because some people don’t actually think such things through.

 

Anyway. Ceteris paribus assumptions make thinking easier, but they hamstring whatever you find out—so that it may be useless, or (hopefully not) worse than useless: misleading.

But maybe it’s possible to keep the crutch of c.p. and make it less foolish.

image

There are some situations where it’s impossible to do what I’m going to suggest—like where space overlaps itself. But in Euclidean spaces it is possible.

http://xorshammer.files.wordpress.com/2010/03/sheaf1_open1.png

Econometricians are already familiar with principal components analysis. You make one “composite dimension” which is composed of a fixed combination of existing dimensions.

composite = .4 × X₁   +   .2 × X₂   +   1.7 × X₃

This is what I’m calling a “super-dimension”.

http://voteview.com/images/polar_housesenate_difference.png

You hold all other things constant so you can think logically about a situation that has the geometry of a single straight line. By creating a composite dimension maybe one could still use the handy ceteris-paribus assumption but roll more of real-life into the model too.

 

For example let’s say as wealth ↑, trips to the emergency room ↓. Then you could form a composite dimension with a positive coefficient on wealth, negative on emergency room visits, and talk about both at once with everything else held constant. One step forward relative to talking only about only wealth ↑↓.

But wait — maybe these are only linearly related around a small neighbourhood of some point. Well, we could still create a composite “super-dimension” by varying the coefficients. This could either come in the form of pre-transforming wealth to be log of wealth, or something else — like a threshold effect where we use two or three linear pieces (eg, rich enough with slope=0, way too poor with slope=0, and middle with a linear decrease). In general, whereas linear means +k+k+k+k+k+k+…, nonlinear can be interpreted as +1.2k+k+.9k+.8k+k+1.1k+1.3k+1.2k+1.4k+…. So instead of constructing a composite dimension with fixed coefficients before ignoring everything else, perhaps one could vary the coefficients along with the space.

That’s all. This may not be a new idea.




@condoroptions Interviews Tadas Viskanta of Abnormal Returns - Part 1

  • brokerage model is broken. mutual fund model is broken. ETF’s are the wave of the future.
  • Minute 10. Did the U.S. equity premium dissolve during the lost decade of the aughties?
  • falkenblog
  • Minute 13. Do proper accounting. Many investors do not receive the headline equity premium due to tax, cost of intermediary services, etc.
  • Minute 15. We have to make decisions at some point. Let’s not count angels on pinheads.
  • Minute 17. First, second, third waves of ETF’s. (the most opinionated segment)
  • Minute 19. “It’s an ETF; how bad can it be?” You’re not getting spot natgas or spot oil. Watch out for the fund’s inefficient rolling of futures contracts.
  • "slow burn" approach to currency investing
  • Minute 22. The time cost of becoming an informed investor (currencies, options, futures, ETF’s, ….) 
  • "It’s really easy to blow up an account trading spot forex"
  • using options to sculpt your portfolio—trading what you understand to limit risk—rather than using leverage to take strong positions
  • liquidity an issue for less famous options
  • "Somebody who’s just trading $AAPL long and short is likely to get shook out of a trade"
  • "There are no good books"
  • PART 2
  • complexity — leverage — liquidity issues
  • cognitive biases & financial advisors
  • financial advisors as a buffer between your decisions and the market
  • advisors who mirror what their clients say
  • Minute 3. Higher turnover by those who hold higher-volatility asset classes.
  • Minute 7. There are a lot of things [non-UHNW] people can do with their lives that generate a lot better financial return than fighting for an extra 100 basis points per year. (e.g., saving). We have infinitely more control over our personal choices than over the markets or whatever products we invest in.
  • Minute 8. People chasing higher yield without understanding what they’re doing.
  • Minute 9. Josh Brown does a post every year reviewing what was the “hot thing” that year. You don’t have to be in it.
  • You’re your own portfolio manager. You get to define success for yourself. That does not mean you need to match the S&P.
  • media consumption — a “liberal arts” or “consilience” or “cross-disciplinary” approach to financial news
  • Minute 12. Individual investors are actually more free than institutional investors, in that their time horizons are quarterly, daily, and annual.
  • Minute 16. Viskanta: In 20 years, brokerages will have automated tools for individual investors. (algorithmic)
  • "the long march of indexing" — Viskanta: people either are or will over-index
  • fracking totally broke the long-run correlation between oil and natgas — an unforeseeable technology





Since [2008], the [US] labor force participation rate (LFPR) has dropped from 66 percent to 63 percent. [Out of 314M people.] Many people have left the labor force because they are discouraged &#8230; (U.S. Bureau of Labor Statistics data indicate that a little under 1 million people fall into this category)&#8230;.
&#8230;Knowing the reasons why people have left (or delayed entering) the labor force can help us [guess] how much of the ↓ might &#8230; ↑ if the economy ↑ and how much is permanent. (For more on this topic, see here, here, and here.)

The chart &#8230; shows the distribution of reasons in the fourth quarter of 2013&#8230;. Young people [usually say they] are not in the labor force &#8230; because they are in school. Individuals 25 to 50 years old who are not in the labor force mostly [say they] are taking care of their family or house. After age 50, disability or illness becomes the primary reason [given]—until around age 60, when retirement begins to dominate.
&#8230;
Of the 12.6 million increase in individuals not in the labor force, about 2.3 million come from people ages 16 to 24, and of that subset, about 1.9 million can be attributed to an increase in school attendance (see the chart below).

&#8212;Ellyn Terry

HT @conorsen
off-topic sidenote: the natural cohort &#8212;vs&#8212; year adjustments, like &#8220;the baby boom has shifted 7 years since 7 years ago&#8221; are an economic example of the covariant/contravariant distinction

Since [2008], the [US] labor force participation rate (LFPR) has dropped from 66 percent to 63 percent. [Out of 314M people.] Many people have left the labor force because they are discouraged … (U.S. Bureau of Labor Statistics data indicate that a little under 1 million people fall into this category)….

…Knowing the reasons why people have left (or delayed entering) the labor force can help us [guess] how much of the ↓ might … ↑ if the economy ↑ and how much is permanent. (For more on this topic, see herehere, and here.)

The chart … shows the distribution of reasons in the fourth quarter of 2013…. Young people [usually say they] are not in the labor force … because they are in school. Individuals 25 to 50 years old who are not in the labor force mostly [say they] are taking care of their family or house. After age 50, disability or illness becomes the primary reason [given]—until around age 60, when retirement begins to dominate.

Of the 12.6 million increase in individuals not in the labor force, about 2.3 million come from people ages 16 to 24, and of that subset, about 1.9 million can be attributed to an increase in school attendance (see the chart below).

Ellyn Terry

image

HT @conorsen

off-topic sidenote: the natural cohort —vs— year adjustments, like “the baby boom has shifted 7 years since 7 years ago” are an economic example of the covariant/contravariant distinction


hi-res




The Pernicious Influence of Mathematics on Science by Jack Schwartz

from a volume of unconventional essays convened by Reuben Hersh

  • single-mindedness, literal-mindedness, simple-mindedness
  • The mathematician converts the scientist’s ideas into axioms. The danger, then, is that the mathematician may convince the scientist that the axioms are true.
  • Science must deal with the unknown or imprecisely known, but mathematics must begin from a precise starting point.
  • absurdities in uniform
  • the sorry history of the Dirac Delta function
  • bad theory with a mathematical passport
  • science leaps ahead whilst mathematics plods behind
  • mathematics can deal only with simple things

reminds me of something @zentree tweeted: mathematics making biologists understand their own science less










projections and history of US petroleum-product usage and production

by the US government via C-SPAN

  • huge projected growth in natural gas usage
  • Marcellus Shale obviously making a huge impact
  • increased profits to primary sector, but this will not hugely change GDP










U.S. homelessness dropped nearly 17% over the past eight yearsvia The State of Homelessness in the USA

hi-res




It’s true that the financial sector enjoyed disproportionate rents but it’s not true that the smartest and brightest work there. …[T]he place is littered with failed scientists. Worse, it’s littered with idiot savants. There are once in a while people working there who have trained for the job — Very good PhDs in finance and economics, for example, or good M&A lawyers, and they usually strike me as the ones who offer the best contributions to their organizations.

@gappy3000

cf, Eric Falkenstein

(Source: condoroptions.com)




Democrats have typically argued that no one company should control more than one-third of existing mobile spectrum—to ensure the existence of at least 3 competitors.

Republicans maintain that spectrum ought to be allocated through open markets — if a company has succeeded in attracting customers and cash flow, it deserves access to the spectrum necessary to serve them.

Bruce Gottlieb, US antitrust lawyer

 

Step one. Appeal to market liberalisation, the benefits of competition, private over public management, and capitalism-as-servitude.

Step two. Social Darwinism. Whoever “won” the market gets licence to a rival public resource (spectrum), preventing new entrants and locking in their lead over existing competitors.

Step two-and-a-half. What happened to the benefits to consumers? What happened to competition? Now the justification for the state granting monopoly has become to incent “winning”. Let’s hope the winner didn’t use money from another line of business to snatch the lead at this particular point in time.

Step three. Winner takes all. Survival of the fittest indeed.

(Source: The Atlantic)