Tag Archives: Finance

Why Work Hour Limits?

Many laws discourage and limit work hours. Laws require holidays and vacations, limit hours per day and week, and require extra payment for work over these limits. And of course income taxes discourage work more generally. The standard economic explanation for these limits is to prevent inefficient signaling. People motivated to gain relative status, to show their extra dedication to success, and to appear more able, work extra hours, for a net social loss. Work hour limits can reduce such losses. (Academic articles here, here, here, here, here.)

This argument makes some sense, but it would make a lot more sense if we set broader and more consistent limits. Yet we don’t at all limit housework, and place few limits on self-employed work. Furthermore, high status occupations are especially exempt. Doctors, lawyers, managers, financiers, artists, writers, athletes, academics, and software engineers often work crazy hours. Yet the signaling argument would seem to apply nearly as well if not better to such high status work. Why are we so selective in our limits?

One explanation is a battle for relative status between professions and activities. Areas where work hours are limited produce less, and so look less impressive. Ambitious folks who want to show their high abilities then choose other areas, leading to an equilibrium were observers reasonably less respect folks who work in limited areas. On this story, work hour limits were set in manufacturing and manual labor in order to reduce the status of such activities.

A second related explanation is that each society is eager to look good to other societies. So each society prefers to encourage, not discourage, activities that are especially visible to outsiders. When outsiders evaluate societies more on the basis of their athletes than their shop technicians, societies naturally subsidize the former relative to the latter.

Another third explanation is that voters support limits on work hours in some jobs mainly as a way to defy and “stick it to” employers, who are seen as evil and in need of taking down. Firms who employ low status workers may themselves seem lower status and “exploitive,” and thus more acceptable targets of ire. Work hour limits serve as a quantity limit which raises wages and thus employer expenses. Any reduction of signaling losses is nice, but mainly a side effect.

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Misers Are Too Fair

Steven Landsburg is exactly right:

Here’s what I like about Ebenezer Scrooge: His meager lodgings were dark because darkness is cheap, and barely heated because coal is not free. His dinner was gruel, which he prepared himself. Scrooge paid no man to wait on him. Scrooge has been called ungenerous. I say that’s a bum rap. …

In this whole world, there is nobody more generous than the miser — the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser *spreads his largess far and wide. …

Put a dollar in the bank and you’ll bid down the interest rate by just enough so someone somewhere can afford an extra dollar’s worth of vacation or home improvement. Put a dollar in your mattress and you’ll drive down prices by just enough so someone somewhere can have an extra dollar’s worth of coffee with his dinner. (more; HT Adrian Kent)

Why are misers so widely criticized, if their gift is distributed unusually equitably, with little chance to receive praise or gratitude in return? Some might suggest this is caused by economic ignorance, but it seems far more likely that misers are criticized exactly because their gifts are equitable.

Humans have had literally millions of years experience begging from one other. Many primates do it, as do foragers. A supplicant appeals to common feelings that one should help associates in need when one is doing well, in the expectation of getting help later when you are in need, and also of sending good signals about your loyalty and ability.

Associates who hint that you should be less miserly and make more overt gifts are not at all hoping that you will spread your gift equitably across the world. They are instead hoping that you will unequally focus most of your gift on them. By criticizing a miserly associate, you are working to take the gift away from those distant recipients. Ask yourself: are you really more deserving than they? Do you care?

Added 1:30p: Karl Smith says:

The miser is not as generous as the dedicated philanthropist. … [He] is withholding his assessment of the most utility maximizing uses of his money. (HT TGGP)

True, but I’d still guess that the miser does more good than the average rich-nation philanthropist.

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When See Solar?

Paul Krugman:

Progress in solar panels has been so dramatic and sustained that … prices adjusted for inflation [have been] falling around 7 percent a year. … If the downward trend continues — and if anything it seems to be accelerating — we’re just a few years from the point at which electricity from solar panels becomes cheaper than electricity generated by burning coal. And if we priced coal-fired power right, taking into account the huge health and other costs it imposes, it’s likely that we would already have passed that tipping point.

Joshua Gans responds:

According to Ramez Naam in Scientific American, the cost of solar photovoltaic models has been falling at an exponential rate since 1980. Installation costs have been falling too. So much so, in fact, that in a decade, solar would outperform the average kilowatt energy cost in the US. A decade after that and it will be approaching the cheap baseload fuels.

Tyler Cowen responds:

If a solar breakthrough is now likely, in which market prices do we see it reflected? It is true that fossil fuel prices took a steep tumble in the last few months, but I’ve never heard anyone suggest that price plunge had to do with a forthcoming solar revolution. … Those shale oil and natural gas discoveries … will further raise the bar against solar power. … Is there a bubble in the stock prices of solar power specialists?  What’s the total market cap of companies selling solar panels?  Or is there a bubble in the share prices of companies which supply cheap and reliable power storage?  The evidence on these points seems weak to say the least.  Keep in mind that other countries can make the switch even if you think political conspiracy will prevent it here. …Is there any reason, based in industry-wide market prices, to be optimistic about the near-term or even medium-term future of solar power?  I don’t see it.

(I posted on this in March.)

When solar is cheaper than coal or oil, that will include the cost of supporting infrastructure, such as building power plants. But since we’ll still have lots of old plants and infrastructure, we’ll still use a lot of carbon. And since places vary in the relative attractiveness of using carbon or solar power, we may even build more carbon plants after that point. Solar getting cheaper than carbon would show up in a gradual fall in global investment in coal infrastructure relative to an alternative still-full-carbon history, and a gradual rise in investment in solar infrastructure.

A transition driven by price lines crossing in twenty years would have very little impact on current stock or commodity prices. At ordinary discount rates used for business investment, returns after twenty years hardly matter. And changing tech and business conditions make today’s top solar firms a poor vehicle for investing in a transition twenty years hence. Of course current stock prices would probably show signs of a price-line crossing if investors expected it to happen in five years. So that scenario can probably be excluded.

This is one of the reasons we could really use long term prediction markets, to more clearly see our distant future. They only require that enough folk care enough about that future to pay to create and subsidize such markets. Alas, few care.

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Official Optimism

Governments consistently overestimate their future budgets:

Analyzing data for 33 countries, Frankel finds that the average upward bias in the official forecast of the budget balance, relative to the realized balance, is 0.2 percent of GDP at the one-year horizon, 0.8 percent at the two-year horizon, and 1.5 percent at the three-year horizon. The longer the horizon, and the more genuine uncertainty there is, the more scope there is for wishful thinking. The bias is not larger for the commodity producers, … or for the developing countries, than for others. …

Over-optimism in predicting growth appears linked to over-optimism in predicting budget balances. On average, the upward bias in growth forecasts is 0.4 percent when looking one year ahead, 1.1 percent at the two-year horizon, and 1.8 percent at three years. The bias in growth forecasting appears in the United States and most other industrialized countries, but not among the commodity producing countries in the sample. …

Over-optimism is more prominent, for both budget balances and for economic growth, during economic booms. …. Countries subject to a budget rule … make official forecasts of growth and budget deficits that are even more biased and more correlated with booms than do other countries. Evidently when such governments exceed the deficit limits set by the rules, they respond by adjusting their forecasts rather than by adjusting their policies …

As a result of budget institutions created in 2000, Chile’s official forecasts of growth and of budget balance have not been overly optimistic, even in booms. (more)

The key institutional innovation [in Chile] is that there are two panels of experts whose job it is each mid-year to make the judgments, respectively, what is the output gap and what is the medium term equilibrium price of copper, rather than leaving the job to government officials. …. A reinforcement of the Chilean idea would be to give the panels legal independence. There could be laws protecting them from being fired, as there are for governors of independent central banks. (more)

Prediction markets forecasting budget balances and growth rates would be easy, and they’d reliably resist political pressure for overly optimistic estimates. So why even bother with trying to figure out how to design expert panels that can remain both expert and independent? Either Frankel naively thinks this easy, he is ignorant of the market solution, or doesn’t really want to promote accurate budget estimates.

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It’s Called “Stock”

There’s something the federal government can do right now to help students caught by our terribly unjust higher-education financing system. … Under an income-contingent loan system, … students pay a fixed percentage of their income toward their loans. Payments are automatically deducted from their paychecks by the IRS. .. After an extended time period of 20 or 30 years, any remaining debt is forgiven. … The concept has been proven to work—Australia and Britain have used it for years— and … the Nobel Prize-winning economist Milton Friedman proposed the idea all the way back in 1955. …

Because student loans can almost never be discharged in bankruptcy, defaulted loans can haunt students for a lifetime. … That is insane. A similar-sounding federal program, called income-based repayment, is now on the books and is scheduled to become somewhat more generous starting in 2014. But the program is administratively complicated, involving income-eligibility caps and requiring students to reapply every year. (more)

Yup, it can be easier to fund investments via “loans” whose repayment amounts are set to be a proportion the venture’s net income. This is usually called “stock,” however, and proposals for private sector stock in individual future income are usually criticized as “slavery.” Especially if such stock claims on income are exempt from the usual bankruptcy evasions. But to most folks the same policy doesn’t seem like slavery if the government does it, just like we refuse to call conscription slavery.

Some argue that the government needs to make student loans because private loan markets fail in this case. But if they fail, it is mainly because we purposely hobble private investors by not allowing them the tools we are allow governments to ensure a return on their investment. This is how a lot of market failures go these days – they are real failures, but failures caused in large part by refusing to allow private actors all the tools we allow governments.

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Trends Worth Tracking

Given our usual way of doing economic analysis, the question of which institutions will most increase economic welfare rarely depends much on the exact values of the sorts of parameters social scientists and the media track with such enthusiasm and concern. (more)

I’ve complained before about useless trend tracking, but I don’t mean to suggest that all trends are uninteresting. Some trends tell us about how well our institutions are functioning. For example:

Accounting statements are getting less and less representative of what’s really going on inside of companies. … The finance industry showed a huge surge in the deviation … from 1981-82, coincident with two major deregulatory acts that sparked the beginnings of that other big mortgage debacle, the Savings and Loan Crisis. The deviation … reached a peak in 1988 and then decreased starting in 1993 at the tail end of the S&L fraud wave, not matching its 1988 level until … 2008.

Neither manufacturing nor IT showed the huge increase and decline of the deviation … that finance experienced in the 1980s and early 1990s, further validating the measure since neither industry experienced major fraud scandals during that period. The deviation for IT streaked up between 1998-2002 exactly during the dotcom bubble. (more; HT Tyler, Thoma)

Now that’s a trend to make me stand up and take notice! Similar parameters where I’d want to watch trends:

  • Marriage cheating and cuckoldry
  • Biased scientific papers, referee agreement
  • Wrongful convictions, faked evidence
  • Biased rulings by sports referees

These sort of trends track the health of specific institutions. When such an institution starts failing, we should be especially eager to reform it, using economic theory to suggest which reforms might be most effective.

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Let Us Give To Future

18 months ago I wondered:

Franklin … [left] £1000 each to Philadelphia and Boston in his will to be invested for 200 years. … by 1990 the funds had grown to 2.3, 5M$. … Why has Franklin’s example inspired no copy-cats?

Thanks to Gwern, I now know of several copy-cats, mostly failures (quotes below). This confirms that many are willing to donate to distant future folks, but are prevented by law, largely from fears that donor funds will eventually dominate the economy. Alas, as these are the likely consequences of allowing donations to the distant future:

1) The fraction of world income saved would increase, relative to consuming not-donated resources immediately. This effect starts small but increases with time, until savings become a large fraction of world income, after which diminishing returns kicks in.

2) While funds are in saving mode, world consumption would be smaller at first, relative to immediately consuming donor resources, but then after a while it would be higher, though it might eventually fall to zero difference. When such funds switch from saving to paying out, or when thieves steal from them, the consumption of thieves and specified beneficiaries would rise.

3) As investment became a large fraction of world income, interest rates would fall, and the market would take a longer term view of the future consequences of current actions.

4) Some would change their behavior in order to qualify for benefits, according to the conditions specified by the original donors and the agents they authorize to later interpret them.

These changes seem good overall, especially if, as I estimate, the future will have many folks in need. Not only would donors actually get to do what they want with their resources, but policy-makers usually lament that savings rates are too low, and interest rates too high, leading us to neglect distant future consequences of our actions. The added consumption given to future folk is mostly stuff that would not exist if not for their donations, so it is hard to begrudge them giving to whom they wish. Our evolved instincts to resist domination makes less sense here, as “dominating” donors are long dead, influencing the world only via largely-altruistic explicit visible instructions.

Note that once physical, if not economic, immortality is feasible (i.e., paying enough lets you survive indefinitely), then original donors can stay around to manage their growing funds. Those promised quotes:

Continue reading "Let Us Give To Future" »

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Downturn Cuts Exercise

It turns out that death rates fall during recessions. I posted in January on how some had speculated that people eat better during recessions, but in fact people seem to eat worse food. Now I can report that people also get less exercise during recessions:

Recreational exercise tends to increase as employment decreases. In addition, we also find that individuals substitute into television watching, sleeping, childcare, and housework. However, this increase in exercise as well as other activities does not compensate for the decrease in work-related exertion due to job-loss. Thus total physical exertion, which prior studies have not analyzed, declines. These behavioral effects are strongest among low-educated males. (more)

The healthy-recession puzzle deepens.

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Firms Fight Risk

To increase efforts to dealt with catastrophic risks, shift responsibility from individuals to firms:

Corporate demand for catastrophe coverage is actually more price inelastic than the demand for non-catastrophe coverage. … A 10% increase in price will reduce quantity of terrorism coverage by only 2.42% whereas it will reduce the quantity of property coverage by 2.91%. This result is in contrast to the findings with respect to individual insurance choices in laboratory experiments and empirical studies on homeowners insurance. …

The majority of homeowners do not purchase catastrophic coverage voluntarily and those cases that do obtain some coverage, exhibit a very elastic demand. … Typically, individuals either ignore those low-probability risks (optimism) or over-estimate them by focusing on possible outcomes without paying much attention to the likelihood of them happening (availability bias). Such bimodal distributions of behavior were also shown experimentally … analyzing actual long-term care insurance decisions by individuals. … Individuals tend to largely neglect risks with a very low probability. However, once a low-probability event takes place, the risk is back in their attention and individuals tend to overinsure against this risk. …

Even when the cost of insurance is subsidized, many people located in high risk areas
still do not purchase coverage. … Even those homeowners who purchased insurance against catastrophe risks (hurricane) exhibited a more price elastic demand for catastrophic risks than for non-catastrophe risks (fire). A related finding is that many individuals are willing to pay significantly more for non-catastrophe insurance than for catastrophe insurance. (more)

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Regulating Gossip

Did you know that people gossip about you? You don’t know who they are, or what they say, and sometimes they say things that (you think) are not true. Important decisions, like whether you get invited to parties, recommended for jobs, or even married, hang on such gossip. Yet there is almost no regulation of it! Government officials don’t track it, or check it for accuracy. There are no standards for what sources people can use in gossip, or how they state their opinions. You aren’t even notified when people gossip about you. Gossip is a virtually impenetrable system in which people, particularly the most vulnerable, have little insight into the forces shaping their welfare. We must have reform!

Sound over the top? Consider:

Information … comes from thousands of everyday transactions that many people do not realize are being tracked: auto warranties, cellphone bills and magazine subscriptions. It includes purchases of prepaid cards and visits to payday lenders and rent-to-own furniture stores. It knows whether your checks have cleared and scours public records for mentions of your name. Pulled together, the data follow the life of your wallet far beyond what exists in the country’s three main credit bureaus. [Firms sell] that information for a profit to lenders, landlords and even health-care providers. …

Who is worthy of credit? The answer increasingly lies in the “fourth bureau” — companies such as L2C that deal in personal data once deemed unreliable. … Federal regulations do not always require companies to disclose when they share your financial history or with whom, and there is no way to opt out when they do. No standard exists for what types of data should be included in the fourth bureau or how it should be used. No one is even tracking the accuracy of these reports. That has created a virtually impenetrable system in which consumers, particularly the most vulnerable, have little insight into the forces shaping their financial futures. (more)

The consequences of ordinary gossip are just as big as with firm gossip on customer finance. And it would be possible to have stronger regulations on ordinary gossip. Yes such regulations couldn’t be perfectly enforced, but then neither can regulations on firm finance gossip. The main reason we don’t have such regulations is that people dislike them. The same people who may well support more regulation on firm gossip on your finances. Why?

It seems to come down to the usual: we are more willing to regulate firms than individuals, and to regulate activity where money is involved than other activity.

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