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kaleberg
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The difference between a boom and a bubble seems only obvious in retrospect. A boom ends relatively slowly as demand and prices slow. A bubble ends precipitously with demand and prices collapsing. I assume that economists have precise metrics for distinguishing booms from bubbles in retrospect. (I am sure that economists know whether the collapse in the demand for and the price of unskilled labor was the end of a boom or the end of a bubble.) One problem is that it is impossible to actually measure value. One can measure prices, but values are just a statistical aggregation of price information. How valuable is the coal in an coal producing area? If solar power and natural gas get cheap enough, the price of coal goes down, but what happens to the value of the field and how quickly? We can laugh at the actors in the tulip bubble, or the fools who bought factories to produce DVD players or horses for breeding or coal mines, but many of them earned good livings from their speculation. Why was the tulip bubble funnier? Was it it's short life? Was it the ratio of the peak to the final trough? People have to estimate values somehow, and watching prices seems to be the way to do it. Sure, you could argue that proper estimations require taking all sorts of other things into account. How big is the market at the anticipated prices? Can the product be replaced by one less costly? Is the style durable or a flash in the pan? Unfortunately, these fundamentals are not always obvious at the time. I agree that the tulip bubble, in hindsight, involved irrational behavior, but I really don't see that behavior as any more extreme than we see in any group of investors today.
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The whole sales pitch for supply side economics revolved around blurring the distinction between wealth and capital. The idea was that there was a capital shortage and the only way to deal with it was to make it easier to accumulate wealth. Effectively, we've wound up with a lot of wealth, mostly concentrated in a small number of hands, but no increase in capital. It's good to learn that there are economists who recognize the distinction. Maybe it will seep into public debate before the next debacle.
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I think this is a step in the right direction. At least Lo realizes that there is something wrong with existing models. The problem I see is that he doesn't go far enough. Economics always seems strangely devoid of even basic human insight. For example, there is an assumption that humans are immortal or at least completely unaware of their own aging and mortality. How can anyone talk about rational markets when human needs are a function of age and circumstance? Economics also seems horribly uninformed by other fields. Even basic ideas from biology or mathematics are too exotic. Look at the reviewer's remark: "In this light, consider fund managers who do beat the big stock indexes for a while. In many cases, their successes are followed by years of poor performance. Why? Because they did not keep adapting to a changing investing environment." Occam's Razor says it's just reversion to the mean. There's no need to postulate anything about investment strategies unless one considers markets completely deterministic. Very tall parents are more likely to have children shorter than they are than very short parents. The whole problem of radical swings is well understood from the point of view of systems theory, so it dates from the 1930s and 1940s. Any moderately complicated system, like a guitar amplifier, is expected to have a certain instability, but economists act surprised when the market suddenly shifts. Is it ideological blindness or merely massive insularity. Lo seems to be taking a few baby steps. Let's hope he and others of his ilk inspire the field to actually start learning how to walk.
Toggle Commented yesterday on Darwin Visits Wall Street at Economist's View
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Shiller is being ingenuous. run75441 has this right. Flipping only worked because there was a market for low grade mortgages to serve as a base for a complex set of badly audited, badly constructed financial instruments. This demand led to a complete relaxation in lending standards, the nearly complete corruption of rating standards and an entire industry dedicated to finding warm bodies to originate loans to. The flippers were just guys who found a few dimes on the sidewalk left by the professional thieves who robbed every bank in the city. Shiller surely knows this, but is trying to make excuses for the scum who sign his paychecks. The whole thing was extremely well documented. The whole thing was completely predictable. There is a complete consensus that people like Shiller are still trying to discredit with garbage like this. At least he isn't blaming the handful of minority members who were issued loans in the heated frenzy of generating bogus mortgage based securities. P.S. Maybe someone can explain to me why economists don't recognize the most obvious argument for purchasing a home as opposed to buying. Buying a house hedges against rising rents. Given that rents are an increasing portion of US consumer spending and this shows no sign of reversing, buying such a hedge makes perfect sense. My guess it is because economists have no problem imagining that corporations prefer lower risk, but cannot seem to imagine why an individual might.
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This fits in with Paul Graham's theory that the most advanced version of anything is just an incremental move towards Lisp, a computer language developed in the early 1960s and that probably peaked in the 1980s. Lisp hackers always argued that program and data structures should have standard textual forms so that arbitrary data structures could be converted to and from a linear stream of bytes in a reliable, human comprehensible way. The move to XML kept the textual stream, but it sacrificed simple comprehensibility by requiring a specific, problem oriented data structure. JSON shit-canned that. It is simply a subset Lisp reader for Javascript data structures, so that all sorts of applications can transmit and receive arbitrary data in a simple, machine independent form. It is no surprise whatever that there is a big move towards JSON, now that the formalists and their ilk are being eclipsed by people who just want to get things done in a relatively straightforward, non-formalized fashion. We're seeing a move away from SQL databases as well, and it's high time. RSS and various other feed formats were based on XML. They were clunky and inflexible. JSON, allowing the transfer of more or less any kind of data, is a great way to move into the future. Those Lisp hackers from the 1960s and 1970s, myself included, are having a good laugh.
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We'll be seeing more of this now that working class whites no longer have family jobs, and decide they can't afford families. People whose job it is to justify not giving money to people and making them lead horrible lives always come up with some kind of excuse that blames whoever they don't want to give money to.
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It was only the violent labor movement that led to the reforms that allowed living standards to start their rise starting in the 1850s.
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Does he explicitly state that he is referring to economics on earth, or is he exploring the exciting field of exo-economics? It is a timely field what with Kepler and other observatories finding new planets on a regular basis. Surely he is not referring to economics our planet when he says: "The capital that is most highly rewarded is now human capital". Good grief. On earth, the capital that is most highly rewarded is inherited wealth in the form of money, real estate, intellectual property rights and shares of corporations. The ratio of effort to reward is infinite. The capital that is almost highly rewarded is accumulated capital which requires some effort to accumulate. Somewhere down with paper clips and miscellaneous office supplies is human capital, the ability to actually do things, rather than just owning things. The apologists are getting desperate if they are producing drivel like this.
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Graydon nailed it. Companies are saving, not investing because there is no growing market for their goods, direct or indirect. Wages have been flat or falling, so investment might improve profit margins, but is unlikely to improve overall profitability. Bunker gets it too. He dismisses the knee jerk idea of cutting taxes that has been proposed as a cure for scabies, stagnation and sarcasm. He's right. There is less and less competition thanks to the lack of antitrust enforcement. Why invest when you have a sinecure? We need more antitrust enforcement.
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I remember visiting Europe on $5 a day back in the 1960s, and gas in the US cost around $0.30 a gallon depending on gas taxes. In Europe, it usually ran about $1 and up for four liters, a bit more than a gallon, except in Switzerland where it was about $0.55. We bought a VW Beetle in Europe and took it home. We liked it so much we sold our old Valiant. It seemed that VW came out of nowhere and grabbed about 10% of the US market by selling small, ugly cars with dinky little engines at low prices but with great, nearly 30 mpg, gas mileage. My father said it was the best car he had owned since the Ford Model A, except he said "shit box" instead of car. There was a big VW place on Northern Boulevard, the gasoline alley that ran from near the 59th Street Bridge to past our house. There used to be all sorts of manufacturing down that way along with the car dealers, gas stations and repair shops. I remember Bell & Howell, the folks who made our 8mm movie camera, had a place on Northern Boulevard, and I worked at a machine shop owned by a friend of the family a few blocks off the main drag. The Sunnyside Yards, a train mustering facility where my friends and I shot a movie, was surrounded by small scale manufacturers. The manufacturers are mainly gone, but the car places are still there. I'm guessing that there are as many jobs, but not as many involved in mass production.
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Anthropologists still have a lot to teach economists. It's a good sign that Paul Krugman has gotten to the point where he can say: "that wages are in no wise pinned down by something called marginal productivity to the extent Econ 101 says" Any woman doing the same job as a man but getting 70% of his pay understands this completely and viscerally. The greater part of "value" is based on societal norms, not anything intrinsic in the work or object. "Who" is often more important than "what". There are societies, even today, where, by law, a man's testimony in court is considered worth the testimony of two women. Are men intrinsically twice as honest and observant as women? There was a European empire now at the fringe of living memory that set salaries based on nationality and race, not the nature of the work. There is a reason employers will not raise wages while bitterly complaining about the availability and quality of workers. I think economics can be a great and useful discipline, but it needs to learn a lot from others.
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You are right. We are pretty far from Byzantium, but we do have our problems. Look at how many states have laws against municipal and county broadband, even when electrical power is handled that way. We have an ideology still in ascendance that encourages granting property rights, and that is a dangerous thing.
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When I read 'The Inheritance of Rome', a book recommended on this site, one of the disorienting statements in the book was that in traditional societies wealth flowed from securing government position, so it was often worthwhile to bribe and curry favor to secure various offices. The example was Byzantium, but this seems to have been the case in many other societies. Whether it was a position as parakoimomenos or control of a salt monopoly or the right to collect taxes in a particular region, the big money was in owning a piece of government action. Then I realized it wasn't all that different today. The obvious cases are things like private prisons or charter schools, where the government pays and private parties rake the big bucks off the top, but it is more extensive than that. Look at the whole idea of a corporation, a government chartered collective entity with extensive rights, no responsibilities and and ability to shelter wealth and income in a way unavailable to individuals. At one time corporations had to serve some public purpose, but that entire idea has been expunged. Despite our technology and our lip service to democracy, we are not all that different from Byzantium.
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I think economics would do better with a new doxology than a new epistemology. I think economists' beliefs have gotten in the way of their knowledge.
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This fits in with Edward Lambert's analyses of effective demand over at Angry Bear: http://angrybearblog.com/2013/05/edward-lambert-on-effective-demand-labor-share-capacity-utilization-and-growth.html The Fed's hair trigger inflation fight doesn't help. Inflation seems to have been redefined as rising wages, so as soon as the economy warms up, the Fed slams on the brakes.
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On the other hand, the relative cost of housing has been slowly rising. In the 1930s, the general wisdom was that housing should cost no more than 25% of one's income. By the 1960s that number was about 33%. Lately, the actual number is in the range of 40-50% for an increasing number of people. This is partly supported by the relatively lower prices of food and clothing. Goods whose value flows from ownership have increased in price while goods whose value flows from labor cost have decreased in price. I agree that this is not sustainable, but it might be part of the Malthusian cycle in the west for the last 1,000 years or so. By the Renaissance European observers noted that there were two types of price increase, fames and cares. The former involved a, usually short term, dearth of a certain good, like food, hence the same root as famine. The latter involved a less force driving the price, generally in a roughly 200 year cycle which some have associated with rising population raising the cost of ownership related goods like housing and, back then particularly, fuel in the form of firewood. US population has doubled since the 1950s. Since Americans have not been reducing their personal housing space, this has meant a lot of construction, and construction requires resources. One way a capitalist system directs resources is by raising prices. (Granted, between 1950 and maybe 1980, the government directed a lot of tax revenue directly and indirectly into subsidizing housing, but these subsidies have long been discontinued.) I'd speculate that house prices are related to the change in demand for housing, so what we are seeing in that chart are pulses in effective demand. That's comprised of rising incomes, people coming of house buying age, and availability of affordable credit. The slow Obama recovery has enabled a lot of former home owners to be able to buy their own homes. Rents are rising in recovering areas, so a home buyer is buying a fixed rental rate as well as a place to live. There are also all sorts of young people who have been living at home and have now gotten jobs that they might think of as careers so they are thinking of moving out and getting their own places. Those two groups could be driving the most recent boom. There's also a third group, investors taking advantage of rising rents to buy rental units that provide a cash flow far superior to anything offered by a bank. Again, this can't go on indefinitely, but it can go on until the end of the current pulse, most likely during Trump's depression or whatever we'll call it. He's a Republican, so odds are he'll tank the economy at some point or another. It's what they do. Then, there will be another recovery and another set of players and the whole thing will repeat again. A true, long lived real estate bust will require an economic collapse that lasts a lot longer than five or ten years. Real estate isn't a particularly liquid investment, but if you have a 20-30 year horizon, the odds still look good.
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I remember the 1970s and the collapse in belief in communism in the Soviet Union. Travelers would report professions of faith as a matter of safety and hope of advancement, but any true fervor had died by the late 1960s. In the 1970s, both the capitalist system and the communist system were sorely tried by a variety of political, social and resource challenges. That's when productivity and worker income in the west stopped growing. It's also when the Soviet empire started running in the red. The costs of empire and hegemony were draining the great powers regardless of economic system. In both types of societies verities and assumptions were under challenge. China, is if anything, living from the 19th century and early 20th century industrialization playbook. There is intensive state control and direction of the economy driving all that apparent entrepreneurial activity. Mao tried to build an individualistic society. China's modern leaders have taken a more corporative, collective approach.
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That's only part of the effect. High tax rates at the upper end lead to higher investment and higher wages. Those things are tax deductible, so they can be seen as nearly free when the marginal rate is 90%.
Toggle Commented Apr 14, 2017 on Tax Reforms and Top Incomes at Economist's View
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Orwell only had half the picture when he asked us to imagine the future as a boot stamping a human face forever. He forgot to mention the arms reaching out and yanking the boot downward, harder.
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Is the nun actually arguing that one cannot understand speech without being able to read? Surely she has heard of young children, illiterate societies and blind people who are capable of understanding the spoken word.
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Nationalism and industrialization are tightly related, but one can trace the rise of nationalism back to the 14th century in Switzerland, Scotland and the Flemish low countries. The last two were getting quite wealthy from the rise of the wool trade, one of the first industries.
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That Gallup study says that 630M people would like to immigrate permanently and 1.1B would like to immigrate at least temporarily. Presumably, their targets would be the US and Western Europe which have a current population of about 720M. Does anyone really believe that the US and Western Europe could maintain their living standards in the face of 630M or perhaps 1.1B immigrants? That's the assumption behind this call for open borders. Nationalism has been a powerful force for progress for all its faults. It weakened the old international aristocracy and the power of the theocrats in Europe. It built local institutions that raised living standards and made it possible to better manage plague, famine and invasion. It was also the force that enabled economic and industrial development. Developing nations like Japan, Taiwan, Korea and Japan know this. Developed nations like France, Germany and the US used to know this. Tearing down the national walls may be great for our new international corporate aristocracy, but it provides little for existing citizens. It makes a lot more sense to bring back capital controls rather than allowing open immigration. Our experiment in tearing down the capital walls has been a failure, and it is time we admitted it.
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Trump was the revenge on the revenge of the nerds. Way back when, nerds were uncool. They got beat up in the hallway and laughed at. Then, the nerds starting getting rich and popular. They graduated from high school and made good. Meanwhile, the non-nerds got decent enough jobs at factories, but the nerds kept closing the factories. The non-nerds didn't even get a consolation prize. Remember all those revenge of the nerds movies? They caught the zeitgeist. The zeitgeist has turned, at least in some quarters. Donald Trump was about Douglas Neidermeyer finally punching John Blutarsky in his fat gut, the way a real man would.
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We have a Republican president. That means lots of borrowing to pay for big tax cuts for the rich, falling living standards for most Americans and at least one serious recession. That's been the pattern for a long time now. I think Eisenhower was different, but he was to the left of Barack Obama. I don't see Trump breaking the pattern. I'm not going to try and predict how Trump's recession will start, but so far we are seeing the usual Republican crash the economy policies being proposed. The simple fact is that Republican economic policies cause recessions and slow economic growth. You can see it by comparing those little recession lines on St. Louis Fred graphs with administration boundaries or comparing the economies of red states and blue states. It's not rocket science. As an investor, however, I think Trump is going to be good for the markets. He is anti-labor, so profit ratios will rise. He is anti-regulation, so various scams will have good runs before they crash and burn. He is anti-growth, so the lack of investment opportunities will result in higher prices for shares of existing concerns. He is pro-deficit, so interest rates will rise on low risk debt. A lot of economists and investors confuse the financial economy with the economy that most people rely on to provide them with food, clothing, shelter and so on. ---- Economists like Rogoff always take me back to the good old days in the 1980s. I used to pick up the English language editions of Pravda or Soviet Life now and then to read about the workers' paradise. They had lots of people like Rogoff there who were willing to spout the usual party line nonsense in exchange for a better apartment or a nice dacha. Sometimes I wonder where all those journalists and economists went. Sometimes I think I know.
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When I bought my first house back in Massachusetts I had to pay the stamp tax to certify the deed. My lawyer explained that while the stamp tax imposed by the British may have led to the revolution, the very first act of the free Massachusetts legislature was to impose the very stamp tax I was paying. It was never about the taxes.
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