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Posts Tagged ‘economics

“A nickel ain’t worth a dime anymore”*…

 

money

 

The instruments of trade and finance are inventions, in the same way that creations of art and discoveries of science are inventions—products of the human imagination. Paper money, backed by the authority of the state, was an astonishing innovation, one that reshaped the world. That’s hard to remember: we grow used to the ways we pay our bills and are paid for our work, to the dance of numbers in our bank balances and credit-card statements. It’s only at moments when the system buckles that we start to wonder why these things are worth what they seem to be worth. The credit crunch in 2008 triggered a panic when people throughout the financial system wondered whether the numbers on balance sheets meant what they were supposed to mean. As a direct response to the crisis, in October, 2008, Satoshi Nakamoto, whoever he or she or they might be, published the white paper that outlined the idea of Bitcoin, a new form of money based on nothing but the power of cryptography.

The quest for new forms of money hasn’t gone away. In June of this year, Facebook unveiled Libra, global currency that draws on the architecture of Bitcoin. The idea is that the value of the new money is derived not from the imprimatur of any state but from a combination of mathematics, global connectedness, and the trust that resides in the world’s biggest social network. That’s the plan, anyway. How safe is it? How do we know what libras or bitcoins are worth, or whether they’re worth anything? Satoshi Nakamoto’s acolytes would immediately turn those questions around and ask, How do you know what the cash in your pocket is worth?

The present moment in financial invention therefore has some similarities with the period when money in the form we currently understand it—a paper currency backed by state guarantees—was first created. The hero of that origin story is the nation-state. In all good stories, the hero wants something but faces an obstacle. In the case of the nation-state, what it wants to do is wage war, and the obstacle it faces is how to pay for it…

The ever-illuminating John Lanchester explains how, over three centuries, the heresies of two bankers became the basis of our modern economy: “The Invention of Money.”

[Lanchester’s latest novel, The Wall, was just long-listed for the Booker.]

* Yogi Berra

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As we learn from the past, we might recall that it was on this date in 1861 that the U.S. government, in anticipation of the expense of the looming Civil War, levied its first income tax as part of the Revenue Act of 1861.  It assessed 3% of all incomes over $800, but included no enforcement mechanism, and so generated very little revenue.  It was revised in 1862 in a more effective form, then rescinded in 1872.

The first peace-time income tax was established in 1894, but was ruled unconstitutional by the Supreme Court (the 10th amendment forbade any powers not expressed in the US Constitution, and the Constitution provided no power to impose any other than a direct tax by apportionment).  It was in 1913, with the Sixteenth Amendment to the United States Constitution, that income tax became a permanent fixture in the U.S. tax system.

HR54_Revenue_Act source

 

Written by LW

August 5, 2019 at 1:01 am

“Any human anywhere will blossom in a hundred unexpected talents and capacities simply by being given the opportunity to do so”*…

 

income

Top: A map consulted by President Lincoln in 1861, demarcating the counties with the most slaves.   Bottom: A detail from Raj Chetty’s Opportunity Atlas, in which areas with poor upward mobility are shown in red.

 

[Raj] Chetty turns 40 this month, and is widely considered to be one of the most influential social scientists of his generation. “The question with Raj,” says Harvard’s Edward Glaeser, one of the country’s leading urban economists, “is not if he will win a Nobel Prize, but when.”

The work that has brought Chetty such fame is an echo of his family’s history. He has pioneered an approach that uses newly available sources of government data to show how American families fare across generations, revealing striking patterns of upward mobility and stagnation. In one early study, he showed that children born in 1940 had a 90 percent chance of earning more than their parents, but for children born four decades later, that chance had fallen to 50 percent, a toss of a coin…

Now he wants to do more than change our understanding of America—he wants to change America itself. His new Harvard-based institute, called Opportunity Insights, is explicitly aimed at applying his findings in cities around the country and demonstrating that social scientists, despite a discouraging track record, are able to fix the problems they articulate in journals. His staff includes an eight-person policy team, which is building partnerships with Charlotte, Seattle, Detroit, Minneapolis, and other cities.

For a man who has done so much to document the country’s failings, Chetty is curiously optimistic. He has the confidence of a scientist: If a phenomenon like upward mobility can be measured with enough precision, then it can be understood; if it can be understood, then it can be manipulated. “The big-picture goal,” Chetty told me, “is to revive the American dream.”…

No one has done more to dispel the myth of American social mobility than Raj Chetty. But he has a plan to make equality of opportunity a reality: “The Economist Who Would Fix the American Dream.”

* Doris Lessing

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As we ponder possibility, we might send imperial birthday greetings to Alexander III of Macedon (or as he’s better known, Alexander the Great); he was born on this date in 356 BC.  After a childhood of tutelage by Aristotle, twenty-year-old Alexander succeeded his father, Philip II, as Basileus (King) of Macedon.  He devoted most of his reign to an unprecedented military campaign through Asia and northeast Africa, and by the age of thirty he had created one of the largest empires of the ancient world, stretching from Greece to northwestern India.  He was undefeated in battle and is widely considered one of history’s most successful military commanders; indeed, military academies still teach his tactics.

At his death he was Basileus of Macedon, Hegemon of the Hellenic League, Shahanshah of Persia, Pharaoh of Egypt, and Lord of Asia.  His legacy includes 20 cities that bear his name (maybe most notably, Alexandria, in Egypt), but more fundamentally, it includes the cultural diffusion and syncretism that his conquests engendered.  For example, Alexander’s settlement of Greek colonists and the resulting spread of Greek culture in the east resulted in a new Hellenistic civilization, aspects of which were still evident in the traditions of the Byzantine Empire in the mid-15th century AD and in the presence of Greek speakers in central and far eastern Anatolia until the 1920s.

220px-Istanbul_-_Museo_archeol._-_Alessandro_Magno_(firmata_Menas)_-_sec._III_a.C._-_da_Magnesia_-_Foto_G._Dall'Orto_28-5-2006_b-n source

 

Written by LW

July 20, 2019 at 1:01 am

“O Gold! I still prefer thee unto paper”*…

 

Gold-coins-e1561933265634

 

The once-fringe fantasy of a return to the gold standard is creeping back into the mainstream.

It has long been dismissed as a fool’s errand, on par with abandoning the Federal Reserve and other trappings of the modern economy. Mainstream economists deride it almost without exception. Reintroducing the gold standard would “be a disaster for any large advanced economy,” says the University of Chicago’s Anil Kashyap, who connects enthusiasm for it with “macroeconomic illiteracy.” His colleague, Nobel laureate Richard Thaler, struggles with its very underlying principle: “Why tie to gold? Why not 1982 Bordeaux?”

Yet the idea that every US dollar should be backed by a small amount of actual gold is more popular than economists’ opinions might suggest. Advocates include members of Congress and president Donald Trump. Enthusiasm for a return to the gold standard has become more prominent since Trump’s most recent nominees to fill the vacant Federal Reserve governorship have endorsed a return. The first two—Herman Cain and Stephen Moore—both dropped out of consideration, but the third, economist Judy Shelton, announced… in a Trump tweet, may be the most ardent in her support

What exactly is the gold standard, and what would it mean if it were re-established? Timely questions: “The quiet campaign to reinstate the gold standard is getting louder.”

* Lord Byron

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As we ponder the pecuniary, we might recall that it was on this date in 1795 that James Swan (who had financed privateers during the Revolutionary War, and used some of his proceeds to support the Continental Army) refinanced the national debt of the United States– $2,024,899 in obligations to the French government– by assuming them personally, at a higher interest rate; he then sold them off to private investors in the U.S. and Europe.

220px-1795_JamesSwan_byGilbertStuart_MFABoston

Gilbert Stuart’s portrait of Swan, 1795

source

 

Written by LW

July 9, 2019 at 1:01 am

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else”*…

 

laffer-curve-napkin-470x426

 

President Trump [recently] announced that economist Arthur Laffer will receive the Presidential Medal of Freedom. Laffer is most famous for his “Laffer curve,” a graph that suggested that lowering tax rates might increase tax revenue. This graph had major political consequences, but made him more notorious than celebrated in the field of economics…

Economists tend to roll their eyes when the Laffer curve is mentioned. A panel of elite academic economists across the political spectrum found in 2012 that none of its respondents agreed that the United States was on the wrong side of the curve. Even George Stigler, a leader of the Chicago School of Economics who disliked taxes at least as much as Laffer, described the Laffer curve as “more or less a tautology.”

Yet the idea has been influential for more than 40 years. The Laffer curve did not begin as a formal economic theory, but as a simple depiction of the relationship between tax rates and government revenue. Legendarily, perhaps apocryphally, it was scribbled onto a napkin after dinner. [A recreation of the legendary napkin, created by Laffer for Donald Rumsfeld, who was at the dinner (with Dick Cheney) where it was supposed first sketched.]

The concept is simple enough. As tax rates increase, people’s incentives to work and make investments decrease because they make less money from them. Above some rate, taxes become so onerous that total revenue goes down because people aren’t as economically active as they would be in a world with lower taxes. The big question is what that rate — the tipping point on the Laffer curve — actually is.

Laffer may have named the curve, but the idea was not original to him. As proponents in the late 1970s liked to point out, the general idea dates to the Arab social theorist Ibn Khaldun, who wrote in the 14th century, “At the beginning of a dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.”

In less remote history, Andrew Mellon, Republican treasury secretary to three presidents, articulated a similar idea in 1924. And when Democrats advocated for the Revenue Act of 1964, which cut the top marginal rate from 91 to 70 percent, their bill made exactly the same arguments. Even Wilbur Mills, the fiscally conservative Democratic chair of the Ways and Means Committee, found himself claiming that the tax cut would “eventually lead to higher levels of economic activity and thereby increase, rather than decrease, revenue.”

Yet it was Laffer’s variant that caught the ear of Republicans in the late 1970s, just as they were shifting from a position as the party of balanced budgets to the party of tax cuts. Indeed, the Laffer curve was a way to say, “Why not both?” One influential ear Laffer caught was that of Wall Street Journal associate editor Jude Wanniski, who made the curve a centerpiece of his 1978 book, “The Way the World Works.”

wanniskicurve1978

Laffer and Wanniski had a champion in Congress as well, in former Buffalo Bills quarterback Jack Kemp. In April 1977, Kemp introduced a bill to cut income tax rates by 30 percent across the board. He started talking about the Laffer curve in October and over the next year mentioned it several more times in Congress.

But it was only with the June 1978 passage of California’s Proposition 13, which slashed property taxes, that the Laffer curve argument exploded into the mainstream. In this new atmosphere of “tax revolt,” the Laffer curve came up 128 times in the Congressional Record in less than four months…

The man who gave (what Will Rogers first called) trickle-down economics its own “curve,” who gave supply-side economics its graphic icon: “Trump is giving Arthur Laffer the Presidential Medal of Freedom. Economists aren’t smiling.”

For more on the “tyranny of curves,” see “Phillips, Laffer and Gatsby: on economists obsessing about curves.” And for more on the out-sized political, economic, and social impact of Laffer’s ideas, see “Starving the Beast- Ronald Reagan and the Tax Cut Revolution.”

* “The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”          -John Maynard Keynes

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As we grapple with graphs, we might spare a thought for a different kind of economist (and one whose impact was much more indisputably positive), Elizabeth Josephine Craig; she died on this date in 1980.  A home economist and journalist, she published dozens of books, mostly cookbooks and volumes of home management advice.  Craig started to cook when she was 6 and began collecting recipes at 12; she began publishing cookbooks after World War I and continued to publish until her death.  Her contribution to English culinary literature comprises a very large collection of traditional British recipes, but also included a considerable number of dishes from other countries, which she gathered during visits abroad (often with her war correspondent husband).

220px-Craig,_E_Cakes_and_Candies_cover source

 

Written by LW

June 7, 2019 at 1:01 am

“Everybody’s talkin’ about hard times / Like it just started yesterday”*…

 

Abrahamian-inequality_img

 

I welcome the Deaton report into inequality. I especially like its emphasis (pdf) upon the causes of inequality:

To understand whether inequality is a problem, we need to understand the sources of inequality, views of what is fair and the implications of inequality as well as the levels of inequality. Are present levels of inequalities due to well-deserved rewards or to unfair bargaining power, regulatory failure or political capture?

I fear, however, that there might be something missing here – the impact that inequality has upon economic performance…

Chris Dillow, a columnist at the Investors Chronicle, enumerates and explains eight ways in which that impact accrues: “How Inequality Makes Us Poorer.”

Image above, from “The Rise of the Inequality Industry,” also eminently worthy of a read.

* “Everybody’s talkin’ about hard times
Like it just started yesterday
People eye know they’ve been strugglin’
At least it seems that way
Fat cats on Wall Street
They got a bailout
While somebody else got to wait
Seven hundred billion but my old neighborhood
Ain’t nothing changed but the date”

– Prince, Ol’ Skool Company album, 2009

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As we realize that more often than not the greater good is good for us too, we might send carefully-charted birthday greetings to François Quesnay; he was born on this date in 1694.  An Enlightenment social philosopher, he was a founding father of Physiocracy, a set of proto-economic theories that held that the wealth of nations was derived solely from the value of “land agriculture” or “land development” and that agricultural products should be highly priced. He published the “Tableau économique” (Economic Table) in 1758, which provided the foundations of the ideas of the Physiocrats.  It was among the first works attempting to describe the workings of the economy in an analytical way, and thus can be seen as one of the first important contributions to modern economic thought.

225px-Quesnay_Portrait source

 

Written by LW

June 4, 2019 at 1:01 am

“Thus did a handful of rapacious citizens come to control all that was worth controlling in America”*…

 

history-of-capital-ai

The evolution of capitalism (“the capital AI machine”) as a series of levels that were unlocked by new “learning” APIs to humans

 

Consider capitalism as a highly efficient objective function (or “AI”) with its parameters optimized for the satisfaction of our short term desires rather than our long term interests.

Paranoia about runaway feedback loops – in consumer capitalism, artificial intelligence, mass media, ‘Wrestlemania politics,’ etc – ultimately stems from the inscrutability of the emergent behavior of these complex systems to the individual actors and observers operating within them.

Rather than responding with Luddite / anarchist nihilism, we should remember that technological and social systems like these have dramatically reduced our exposure to the unpredictability of the natural world and greatly improved living conditions on a number of dimensions over the past few centuries.

At the same time, we should not ignore warning signs of a dystopian future, nor should we hope that a ‘personnel change’ of institutional leaders will solve our problems.

Because the problems at hand are complex systems problems – where the root causes are not the actors themselves, but the ill-designed structures and incentives that dictate their actions – we should think about redesigning the rules and incentives of social, political, and economic systems as the path forward…

Andrew Kortina explains modern capitalism as a system– one that, for all of its all-too-manifest faults, should be saved; then he starts the conversation about how to do that salvaging: “History of the Capital AI & Market Failures in the Attention Economy.”  Mildly geeky, but richly provocative– which is to say, useful, whether one buys his suggested solutions or not– it’s eminently worthy of a read.

* “Thus did a handful of rapacious citizens come to control all that was worth controlling in America. Thus was the savage and stupid and entirely inappropriate and unnecessary and humorless American class system created. Honest, industrious, peaceful citizens were classed as bloodsuckers, if they asked to be paid a living wage. And they saw that praise was reserved henceforth for those who devised means of getting paid enormously for committing crimes against which no laws had been passed. Thus the American dream turned belly up, turned green, bobbed to the scummy surface of cupidity unlimited, filled with gas, went bang in the noonday sun.  – Kurt Vonnegut, God Bless You, Mr. Rosewater

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As we wonder about the water in which we swim, we might recall that it  was on this date in 1933 that the Agricultural Adjustment Act came into force.  A central piece of New Deal legislation, the AAA aimed to aid farmers devastated by reduced demand for their crops by creating price supports via a series of government purchases (of crops and livestock) and subsidies (essentially payments not to plant/grow).

The program was controversial in its time– it made previously independent farmers dependent on the government– but it worked; average farm income rose 50% from 1932 to 1935.  It’s elements– government purchase and subsidy– survive to this day, evolved into (many of) the provisions of the Farm Bill, passed by Congress every five years or so… even though the constituency of small farmers the Act was intended to serve has largely given way to an agricultural landscape dominated by a handful of gigantic corporate players.

farmer

A Roosevelt County New Mexico farmer and a County Agricultural Conservation Committee representative review the provisions of the Agricultural Adjustment Act (AAA) farm program to determine how it can best be applied on that particular acreage

source

 

“There are three types of lies — lies, damn lies, and statistics”*…

 

Charts

“Hiding in Plain Sight”

 

A chart’s purpose is usually to help you properly interpret data. But sometimes, it does just the opposite. In the right (or wrong) hands, bar graphs and pie charts can become powerful agents of deception, tricking you into inferring trends that don’t exist, mistaking less for more, and missing alarming facts. The best measure of a chart’s honesty is the amount of time it takes to interpret it, says Massachusetts Institute of Technology perceptual scientist Ruth Rosenholtz: “A bad chart requires more cognitive processes and more reasoning about what you’ve seen.”…

Five examples (like the one above) of the kinds of tricks that charts can try to pull, explained: “Five Ways to Lie with Charts.”

* Benjamin Disraeli

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As we stack the deck, we might recall that it was on this date in 2010, at 2:32p EDT, that the U.S. stock markets suffered a “Flash Crash”– in a period of just 36 minutes, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite collapsed and rebounded (the Dow, e.g., lost 9% of its value, then recovered most of it).

Nearly five years later, the SEC charged a 36-year-old small-time trader who worked from his parents’ modest stucco house in suburban west London with having caused the collapse (using spoofing and layering, along with a form of front-running– all now explicitly outlawed).  But many experts are not convinced; to this day, there are numerous theories– but no consensus– as to the cause(s) of the crash.

Flashcrash-2010

The DJIA on May 6, 2010 (11:00 AM – 4:00 PM EDT)

source

 

Written by LW

May 6, 2019 at 1:01 am

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