Friday, July 26, 2019

Khan Academy video and quiz on FX and trade

Video 1:  Introduction to FX (Foreign eXchange)
     Take-away:  This is too basic for most MBA students as it describes the individual transactions the comprise an FX market.

Video 2:  FX markets
     Take-away:  How foreign exchange rates are determined (Demand/Supply analysis), again probably too basic for most MBA students.

:   Read this for a good summary of how exchange rates are determined.

QUIZ:  Test yourself on FX markets

Pension problems in Connecticut

The ALEC came out with its rankings of pensions, and Connecticut was the worst.

Connecticut ranks last with a dismal 19.7 percent funding ratio, down 3.1 percentage points from last year. Connecticut is one of four states to set retiree benefits through collective bargaining and is unique in that the legislature does not have to consent to contracts for them to go into effect.viii A total of 124 contracts have been passed without a vote in either chamber in the legislature 
Under these rules, politicians can abstain from making politically difficult decisions needed to protect taxpayers from future pension fund bailouts and retirees from the consequences of a future pension default. Such decisions could anger current public sector union membership, placing personal political careers at risk. In late 2016, Gov. Dan Malloy came to an agreement with the state employees union to extend the amortization period of the official unfunded liability to 2046. In other words, the state will delay paying down these liabilities.x Because the fund will have relatively fewer assets generating investment income over the next two decades as a result of this delay, a combination of higher taxes, reduced state services, and pension benefits cuts becomes more likely in future years. In addition, Connecticut continues to use an assumed rate of return in excess of 8 percent to estimate unfunded liabilities—more than 5.8 percentage points higher than the risk-free rate of return. Such baseless optimism threatens the state’s fiscal solvency.

The problem seems so obvious and easy to solve that one wonders why they don't try something like Wisconsin:

Relative to other states, Wisconsin is in a league of its own with a 61.5 percent funding ratio (using a risk-free rate of return assumption). The next most responsibly managed state pension system, South Dakota, is 13 percentage points less funded than Wisconsin. The state of Wisconsin does far better than others in pursuing retirement security to current and past employees, alongside fiscal responsibility to taxpayers. 
Wisconsin’s relatively high funding ratio is due in large part to the unique design of the state’s hybrid pension. A typical hybrid pension has a traditional DB and a defined-contribution (DC) 401(k) benefit, the proportions of which vary from plan to plan. Wisconsin’s hybrid plan does not have a 401(k) benefit portion, but instead pays an annual dividend based on the health of the pension fund and the age of the retiree.vii Unlike a traditional DB plan, which provides a payout regardless of fund performance, a performance shortfall does not necessitate higher employee and/or taxpayer contributions to make up an additional gap between assets and liabilities. With this hybrid plan, underperformance simply results in a lower annual dividend, avoiding an underfunding issue.

Thursday, July 25, 2019

Why is Spain so successful?

In 1950, Spain was poorer than Argentina, Chile, Mexico, Peru, Uruguay, and Venezuela, and roughly equal to Colombia, Bolivia, Costa Rica, Cuba, Ecuador, Guatemala, and Panama. This is 11 years after the end of the Spanish Civil War, and Spain of course stayed out of World War II.

 Now it is the richer than all of them.
The [1959] “stability plan” broke an inward-looking development model with growing barriers to trade that had been followed since 1874. ... The combination of macroeconomic stability, freer flow of goods and capital, and stronger state capability triggered several decades of fast economic growth.
To a considerable extent, the economic history of Spain since 1959 is a textbook example of modern economic growth: get a few institutions right and ride them into prosperity. European transfers after Spain joined the E.U. in 1985 are a rounding error. And joining the E.U. was the consequence of growth, not the cause.
Interestingly enough, Cuba had the same income per capita than Spain in 1959 and better literacy, education, and many other indicators. A few decades of ignoring markets and see what happens.


Saturday, July 20, 2019

The alternatives to agreement determine the terms of agreement

AT&T's DirectTV (distribution) has failed to reach agreement with CBS (content).   The absence of CBS programming on DirectTV could cause DirectTV to lose subscribers:

CBS could gain more leverage during negotiations if the blackout drags on for more than a month. CBS has rights to broadcast National Football League games, popular programming for viewers across the U.S. CBS coverage of the regular season starts on Sept. 8, with the preseason beginning on Aug. 18.

However, DirectTV has some alternatives to CBS programming.

A person familiar with AT&T’s plans said the company is planning to direct its customers toward alternatives such as Locast and local channel connector devices that will allow them to watch NFL games.
 These alternatives to agreement will ultimately determine how profit is split between AT&T and CBS

Thursday, July 18, 2019

Why do innovative "clusters" form?

Interview with Economist Enrico Moretti suggest three factors that lead to manufacturing agglomeration are much stronger for firms engaged in innovation:

The first one is the existence of knowledge spillovers, also known as human capital spillovers: the fact that our human capital depends not only on where we go to school and how much schooling we get, but also on the people who surround us and from whom we learn. 
The second one is the matching advantage offered by thick labor markets. ... For example, if you are a biotech engineer specialized in, say, biofuel and you work in Silicon Valley, where at any moment in time there are a thousand biotech firms looking for biotech engineers, you are more likely to find the one that studies biofuels ... A better match ... results in higher productivity. 
The third channel is the thickness of the market for specialized services. Again, if you are in an area where there are many other firms like yours and they all need a very specialized type of vendor, you are more likely to find it in an area where there's a big agglomeration of firms in the same sector. 
All three factors exist in manufacturing, of course. But they are much stronger for firms and workers that engage in innovation.
In computer science, the top 10 cities account for 70 percent of all the innovation, as measured by patents. For semiconductors, it's 79 percent. For biology and chemistry, it's 59 percent.

What's the best way to provide opportunity?

Good profile of economist Raj Chetty who finds that housing vouchers which allow poor families to move to "opportunity" neighborhoods, help younger kids catch up to richer peers.  President Trump signed a bill that uses the research to guide policy:

Tenants have just started moving, but the program is already successful: The majority of families who received assistance moved to high-opportunity areas, compared with one-fifth for the control group, which was not provided with the extra services. Chetty estimates that the program will increase each child’s lifetime earnings by $88,000. In February, President Donald Trump signed into law a bill that provides $28 million to try similar experimental programs in other locations. 

However, Chetty still doesn't know what makes neighborhoods better:

For example, the strongest correlation is the number of intact families. The explanation seems obvious: A second parent usually means higher family income as well as more stability, a broader social network, additional emotional support, and many other intangibles. Yet children’s upward mobility was strongly correlated with two-parent families only in the neighborhood, not necessarily in their home. There are so many things the data might be trying to say. Maybe fathers in a neighborhood serve as mentors and role models? Or maybe there is no causal connection at all. Perhaps, for example, places with strong church communities help kids while also fostering strong marriages. The same kinds of questions flow from every correlation; each one may mean many things. What is cause, what is effect, and what are we missing? 


Monday, July 15, 2019

Competition among states for businesses

In the 1980's, when I began teaching, little or no attention was paid to customers (students).  That changed with the national rankings of colleges.  The rankings drove demand, which began a competition, especially among private business schools, to rise in the rankings.

Now a similar ranking of the best states in which to start a business may start a similar competition, like the "bidding" for a new Amazon Headquarters.  Here are the losers and winners:
The results are hardly surprising: High-tax, Democrat-controlled states in the northeast offer some of the worst conditions for businesses, while low-tax states, Republican-controlled states in the Sun Belt have some of the best conditions.

Friday, July 12, 2019

Does decreasing Type II errors leads to more Type I errors?

TYPE I ERROR:  False prosecution
TYPE II ERROR:  False non-prosecution

Until 2011, Title IX (the law that prohibits sex discrimination at federally funded schools) was rarely enforced because of a strict standard of proof. That changed under President Obama.  With lower standards of proof and evidence rules that favored prosecution, we should see Type II errors fall, but with a corresponding increase in Type I errors.
Defamation claims are the new legal tool for men to clear their name and get their accuser to drop sexual assault complaints, according to legal experts. The defamation cases usually end in settlements.

“Over the last three and half years, there’s been far more legal action brought by men charged by the institution with a sexual assault violation,” said Saunie Schuster, a lawyer who advises a range of colleges and co-founded the Association of Title IX Administrators. “The trend was for them to file an action against the institution for due process, but along the way, we started seeing them not just going to file action against the institution, but also civil actions against the victims.”

It is really hard to tell whether Type I or Type II errors changed by court filings, as the selection of cases for trial is not random.  In cases like this, the only recourse is to theory, like that taught in statistics class, showing that reducing one type of error causes an increase in the other.


Snack sales jump in states where weed is legal

Tuesday, July 9, 2019

Is a Universal Basic Income a good idea?

WSJ editorial arguing for an expansion of the Earned Income Tax Credit (EITC) rather than a Universal Basic Income (UBI). Rather than giving everyone $1,000 per month (this would cost so much in taxes that it would destroy jobs), a guaranteed-income program would offer transfers only to individuals whose monthly income falls below $1,000, thereby coming in at a mere fraction of a UBI’s cost.  By providing "insurance" (when your income falls) as well as "opportunity" (jobs), the EITC seems much better than the UBI.

In the US, the top policy goals should be universal health care, more generous unemployment benefits, better-designed retraining programs, and an expanded earned income tax credit (EITC). The EITC already functions like a guaranteed basic income for low-wage workers, costs far less than a UBI, and directly encourages work. On the business side, reducing the indirect costs and payroll taxes that employers pay for hiring workers would spur job creation, also at a pittance of the cost of a UBI.

Note that economists always evaluate policies like the Universal Basic Income relative to its next best alternative. If the alternative is better, we say that the opportunity cost of the UBI is bigger than its benefits.

Monday, July 1, 2019

Algorithmic Gender Bias?

Last week I got to attend the always enlightening annual ZEW ICT Economics Conference. One of the Keynotes was from the always insightful, Catherine Tucker. In one part of her talk she related that her team conducted an experiment to place a generic ad for a STEM educational program on social media only to find out it was shown much more often to men/boys than women/girls. Algorithmic bias, right!?

Digging a little deeper, they discovered that their bid lost out on the ad auction for females more often because others would bid higher. Ads are placed based on the results of real time auctions for "eyeballs." It turns out that men are cheap (pun intended). That is, women control so much more discretionary spending that they are more heavily courted by advertisers with higher auction bids. The STEM ad bid was the same for men and women and so lost out more often when it had to compete with stronger bids for female "eyeballs."

Thwarting neo-Nazis by Denying them Beer

The BBC posted a story a week ago "Beer ban leaves German neo-Nazi rock fans thirsty." Right-wingers descend on this town for a 'music' festival that the local courts have deemed something more.
The Dresden court justified its ban on alcohol at the festival by saying "the event has an obviously martial and aggressive character", and there was a risk that alcohol could make violence more likely.

Townsfolk worried that the attendees would simply purchase from the local grocery stores and so bought more than 200 crates of beer in the town's supermarkets. Festival attendance fell by half. That is changing the game to obtain more desirable results.